Few companies symbolize the rise and fall of tech stocks over the past two years better than Shopify (SHOP -2.37%). Before the pandemic, the stock peaked at around $50 per share and reached a high of nearly $170 last November. Now, the stock trades around $40 per share, 20% down from its pre-pandemic high.
Were the pandemic gains too much? Absolutely. Is the stock's current price reasonable? I don't think so. Shopify has made significant strides over the past two years, even with some stumbles. I think better days are ahead, and investors should use the stock's current weakness to establish a position.
Shopify's phase 2 growth plan is solid
Shopify's software gives any company the tools to run an online store, including a website, payment processing, and inventory management. At its lowest tier, a Shopify store is only $29 per month, but this price can quickly increase with more add-ons.
The primary investment thesis for Shopify revolves around clients adding more products to their subscription package. The company laid out four key investment themes in Shopify's latest quarterly slide show.
- Building buyer relationships
- Going global
- From first sale to full scale
- Simplifying logistics
All of these point to an increased use of the platform's ancillary products. The first key, building buyer relationships, is highlighted by Shopify Audiences and Collabs, essentially advertisement tools that allow businesses to see how they reach their audience.
Pertaining to the second key point, Shopify also has tools for stores to translate and tweak their websites to be effective worldwide and handle currency conversions.
The last two key points focus on growing a fledgling business into a full-on commerce giant. This can be accomplished with Shopify Capital (a business financing program) and Shopify Fulfillment (its shipping network). The lending wing allows customers to rapidly grow their business, while the fulfillment network can deliver packages within two days, allowing smaller businesses to compete with the e-commerce giants.
The next phase in Shopify's growth plan is solid, but how is it being executing?
Shopify Payments will be crucial to its growth
One key metric Shopify points to is its merchant solutions' attach rate, defined by merchant solution revenue divided by gross merchandise volume (GMV). Essentially, this is the company's take rate -- the amount of money Shopify takes from each dollar spent in one of its stores. This metric has been steadily rising and will continue to do so as the company rolls out and expands its various services.
Source: Shopify.
Management pinpointed three catalysts as GMV drivers: Shopify Payments, Shopify Capital, and Shopify markets. Of these three, Payments is the segment I'm most excited about.
Shopify Payments is its payment processing solution. In the third quarter, GMV processed through Shopify Payments was $25 billion, up 22% year over year. However, compared to the $46.2 billion in GMV processed through Shopify in the third quarter, Shopify Payments has a lot of room to expand.
One key bearish argument against Shopify is its lack of profitability. Its operating loss in the third quarter was $345 million, worse than the $4.1 million loss last year. This rapid rise in expenses is concerning, especially because revenue growth didn't outpace expense growth. But this quarter still includes hefty compensation from severance packages it gave to about 10% of its workforce after layoffs were announced in late July.
I'll be watching operating expenses closely in the first quarter (once the expenses unaffected by the layoffs are available) to see if the company has learned its lesson or if it is back to its old habits.
Still, Shopify has a huge opportunity in its international, payments, and shipping businesses. The company stumbled by overhiring, but it quickly corrected course. Besides that slip-up, management has a phenomenal track record, and I trust them to lead the stock higher over the next few years.
