Once a darling among investors, Shopify (SHOP 1.11%) has fallen back to the ground. In less than 12 months, the stock price fell by more than 80% (as of this writing) from its peak.
But before we all rush into loading up on the stock (especially new investors), here are two crucial aspects investors should know about the company.
Image source: Getty Images.
1. A quick overview of Shopify's cash-generating machine
Shopify is a tech company providing the tools to help anyone -- individuals or small and large companies -- to sell products to anyone and everywhere.
It started as a software-as-a-service (SaaS) provider enabling small businesses to sell products online. Over time, it added new services such as payments, logistics, and others to help merchants run their online and offline businesses.
Via Shopify, entrepreneurs can start selling their products online by subscribing to a monthly plan for as low as $19 per month. Also, Shopify offers higher-level subscription plans for bigger businesses and brands, giving them access to more advanced and comprehensive tools and services. Heinz, Unilever, and Staples are examples of more prominent brands using Shopify's services .
Shopify generates revenue mainly through two areas: subscription solutions and merchant solutions. The former relates to the recurring monthly income Shopify receives from customers who subscribe to the various monthly plans. The latter depends on different value-adding services that Shopify provides customers, including payments, financing, and shipping.
For the year ended Dec. 31, 2021, Shopify generated $1.3 billion in subscription solutions and $3.3 billion in merchant solutions. And of the $4.6 billion in revenue, the United States represented 65 % while the rest were overseas.
2. Shopify's prospects in the next few years
Shopify's track record in the last few years has been nothing but incredible. From 2017 to 2021, Shopify's enabled gross merchandise value (GMV) grew more than sixfold to $175 billion. Revenue followed suit, up by 585% to $4.6 billion.
Shopify's growth put it in the league of big companies, but there is no reason to think such expansion will end anytime soon.
According to Shopify, it had just 10.3% of U.S. e-commerce sales in 2021 (based on GMV), lagging behind the leader, Amazon, which had a 41% market share. Besides, e-commerce sales represented around 12.9% of total retail sales in the U.S., so the tech company's share of total retail sales is not even 2%. In short, the growth opportunity remains enormous for the company.
At its core, Shopify's subscription services and other value-adding tools such as Shopify Payments, Shopify Shipping, and Shopify Capital will keep the company busy for a long time. But the company is not stopping there. It is expanding aggressively in overseas markets, adding new services like Retail POS and Shop Pay Installments, further expanding its market reach. In the long term, Shopify's strategic investments in its fulfillment network and Shop App could open up new income streams.
As long as Shopify can continue to delight merchants with new or better tools and services, there are good reasons for it to attract new customers while retaining the existing ones. Happy customers, in turn, will keep its growth wheel spinning for years to come.
A quick word on Shopify's valuation
Now that we have learned about Shopify's business model and prospects, the other thing that investors need to know is whether Shopify's stock is cheap today.
While there is no simple rule to this, we can compare Shopify's current valuation to its recent past and peers to get a quick feel. As of writing, Shopify has a price-to-sales (P/S) ratio of 8.2, which compares favorably to its five-year average of 30.3. But if we compare it to a peer, say, Amazon, with its latest P/S ratio at 2.4, the former trades at a significant premium over its larger peer.
So it depends on how investors look at this. If they love Shopify -- for its business model and prospects -- the current valuation looks attractive. But bear in mind that the stock is rather pricey compared to some of the best companies like Amazon.
