Shopify (SHOP 2.63%) has seen its share price tumble 70% since peaking in late 2021, dragged down by a combination of slowing growth and weak guidance, both of which can be traced back to the challenging economy. For context, the stock has never fallen more sharply at any point since Shopify became a public company in 2015.
Admittedly, investors have good reason to be skeptical. Shopify saw revenue growth slow to 25% over the past year, a shocking deceleration from 71% revenue growth in the previous year. The company also reported negative free cash flow of $200 million, a significant deterioration from positive free cash flow of $458 million in the previous year.
The company got hit by high inflation and unfavorable foreign exchange rates, but those are ultimately temporary headwinds and they have no bearing on the long-term investment thesis. That means the current drawdown actually left investors with a once-in-a-generation buying opportunity.
Here's why.
NASDAQ: SHOP
Key Data Points
Shopify is a major player in a big market
Shopify is a turnkey solution for commerce. Its software brings dozens of sales channels together, providing merchants with a single platform to manage their businesses across online marketplaces like Amazon, social media like TikTok, direct-to-consumer (DTC) websites, and brick-and-mortar stores. That broad utility distinguishes the company from the vast majority of retailers and e-commerce software vendors.
Shopify also provides adjacent merchants solutions, including financial services like payment processing, financing, and money management, as well as tools for marketing and cross-border commerce. Merchants can also access thousands of third-party integrations through the Shopify App Store. Those products make its platform stickier, and merchant adoption is rising despite the difficult economic climate. In fact, in the most recent quarter, Shopify reported a 2.14% merchant attach rate -- merchant solutions revenue as a percentage of gross merchandise volume -- which is a record high for the company.
In a nutshell, Shopify is the commerce engine that empowers merchants to break free from the mold created by online marketplaces like Amazon, allowing them to engage buyers and build relationships across a multitude of sales channels. Thanks to its robust functionality, Shopify ranks as the most popular e-commerce software on the market, according to research company G2. That puts the company in a good spot; retail e-commerce spend is expected to grow at nearly 14% annually to reach $15 trillion by 2030, according to Ameco Research.
Building the future of commerce
Shopify continuously develops new products and features for its platform, which should help it maintain its leadership among e-commerce software vendors. But the company outlined two potentially game-changing growth projects that could substantially strengthen its market presence: onboarding larger businesses with Shopify Plus and simplifying logistics with the Shopify Fulfillment Network (SFN).
Shopify Plus: Large brands often require more flexibility than small businesses, and Shopify Plus is an enterprise-level commerce platform engineered for that purpose. It features developer tools that support customized digital storefronts and checkout experiences. Plus merchants can also access machine learning-powered marketing software that supports targeted ad campaigns on Meta Platform's Facebook and Instagram and on Alphabet's Google Search and YouTube. Shopify Plus also includes business-to-business (B2B) commerce tools, meaning merchants can sell D2C and B2B from a single platform.
That dramatically expands Shopify's addressable market, as B2B e-commerce sales are expected to grow at 20% annually to reach $33 trillion by 2030. And Shopify is well-positioned to capitalize on that opportunity. While Shopify's basic subscription plans represent the most popular e-commerce software on the market, Shopify Plus is actually the second-most popular platform.
Shopify Fulfillment Network: The SFN simplifies logistics from "port to porch" by supporting merchants across three critical phases of the supply chain: inbounding inventory from suppliers, moving inventory to distribution centers, and delivering orders to consumers. The SFN will be a headwind to profitability as it continues to ramp up in the coming quarters, but the long-term benefits are undeniable. The SFN will allow merchants to guarantee two-day or next-day delivery across multiple sales channels, including online marketplaces, social media, and DTC websites. No other commerce company affords merchants the same flexibility.
Beyond the obvious benefits, the promise of fast delivery could also increase buyer conversion rates by 30%, according to management, and the allure of simplified logistics could bring more large brands to Shopify Plus.
A once-in-a-generation buying opportunity
In summary, Shopify is already the leading vendor of e-commerce software. Better yet, its merchants accounted for 10.3% of online retail sales in the U.S. in 2021, second only to Amazon. But its ambitious growth strategy could help it gain ground in a quickly growing multi-trillion-dollar market, potentially propelling Shopify toward a $1 trillion valuation over the next decade or two. Companies like that don't come around all that often.
For that reason, with shares trading at 11.5 times sales -- an absolute bargain compared to the five-year average of 29.4 times sales -- Shopify stock is a once-in-a-generation buying opportunity.
