There have been plenty of high-profile stock splits this year. And on July 6, video game retailer GameStop (GME 2.83%) announced that it was joining the fun. The company will conduct a 4-for-1 stock split that will take effect on July 22. Although the move generated renewed interest in GameStop, it hardly constitutes a reason to buy its shares. GameStop faces multiple headwinds, including inconsistent revenue and profits (or lack thereof) in a struggling industry.
Other companies that recently performed stock splits look like much better buys, and Shopify (SHOP 0.45%) is one of them. The e-commerce specialist recently completed a 10-for-1 stock split. Although the transaction did not fundamentally change the value of Shopify's business, let's see why this tech giant is still worth investing in, even after a challenging year on the stock market.
The ongoing shift to e-commerce
There are nearly 32 million small businesses in the U.S. In today's digital age, companies know an online presence is a must to reach their customers. Shopify provides a platform to allow small and medium-sized businesses build such an online presence. The company does much of the heavy lifting, helping merchants set up online storefronts, payment solutions that can adapt their online and brick-and-mortar channels, marketing solutions, and more.
That way, business owners can focus on running their businesses and attracting customers. Shopify has made tremendous headway in the past five years, but plenty of whitespace remains. The company ended 2021 with 2.06 million merchants on its platform. That represented an increase from the 1.75 million it had as of the end of 2020. Shopify's merchant count represents a small percentage of all small businesses in the U.S., but that hardly tells the whole story.
About 55% of these merchants were in North America, which includes Canada, where Shopify's headquarters are situated. Shopify continues to make a push in international markets where there is also a world of opportunities. Overall, Shopify sees a $160 billion addressable market. That makes its first-quarter revenue of $1.2 billion -- which increased 22% year-over-year -- seem comparatively small.
While Shopify isn't the only company looking to profit from these opportunities, it is one of the leaders. In 2021, Shopify's platform accounted for 10.3% of total U.S. retail e-commerce sales; the company was second only to Amazon in this department. A strong position in the competitive e-commerce market bodes well for Shopify's future.
Shopify's moat
Here's one more reason to be excited about Shopify's future: The company's competitive advantage. Shopify offers a suite of complimentary services that are "sticky." As Shopify's president, Harley Finkelstein, explained:
What tends to happen -- the Shopify business model that really hasn't changed in a couple of years is that there are these different on-ramps at the Shopify. People come to Shopify to solve a single problem. And then once they come in, they realize we can solve more of their problems.
These dynamics confer Shopify's platform high switching costs. Its merchants, having spent plenty of time and money building and perfecting their online stores, won't want to jump ship without a compelling reason. Otherwise, they risk business disruptions and the potential loss of clients, which would affect their financial performance.
Look beyond near-term drivers
Shopify is struggling this year for a variety of reasons. The company's coronavirus tailwind halted, and revenue growth rates dropped year over year. Shopify also recorded a massive net loss in the first quarter. Shopify's bottom line during the period was $1.5 billion, compared to the net income of $1.3 billion it reported during the first quarter of 2021.
Importantly, Shopify's net loss was due primarily to unrealized and realized losses on equity investments. Things could get worse before they get better for Shopify as a result of inflation and other economic troubles. But in the long run, the company's prospects remain intact. E-commerce sales will only increase in the coming years.
And with a massive addressable market at its disposal, Shopify will continue to grow its revenue, eventually becoming consistently profitable. It is difficult to say the same about GameStop, a company whose future is in jeopardy due to industrywide problems. Stock split or not, one of these stocks is worth investing in, and it isn't GameStop.
