Last week, Shopify (SHOP 0.23%) reported better-than-expected financial results for the fourth quarter. Revenue increased 26% to $1.7 billion, and the company returned to non-GAAP profitability with adjusted earnings of $0.07 per share. However, while those numbers beat analysts' projections, they still look bad compared to the prior year, when revenue rose 41% and Shopify reported non-GAAP earnings of $0.14 per share.
Unfortunately, management also provided grim guidance for the current quarter. Revenue growth is expected to fall into the high teens, which implies a sequential decline in sales. Meanwhile, operating expenses are expected to rise, chewing away at already-weak profitability. That was the last straw for some investors, and the stock plummeted in the wake of the earnings report. In total, Shopify's share price has dropped 74% during the ongoing bear market.
Fortunately, that creates a perfect buying opportunity for patient investors. Here's why.
Shopify is the market leader in e-commerce software
Shopify allows merchants to manage sales across physical and digital channels from a single dashboard. Its software integrates with online marketplaces like Amazon, social media apps like Instagram, direct-to-consumer websites, and brick-and-mortar shops, bringing them together behind a single interface. Shopify also provides adjacent services like payment processing and financing, and it offers marketing software and logistics support. In a nutshell, the company simplifies most aspects of commerce, and its platform gives merchants far more flexibility than rivals like Amazon provide.
That strategy has been very successful. Shopify is the leading e-commerce software vendor in terms of user satisfaction and market presence, according to research company G2. It is also the second-largest e-commerce company in the U.S. with 10% market share. That positions Shopify for growth in the years ahead. Retail e-commerce sales in the U.S. alone will increase at 12.3% annually to reach $1.7 trillion by 2026, according to eMarketer.
Shopify is growing upmarket (and expanding its market opportunity)
Shopify Plus is the company's offering specifically designed for larger brands. It comes with more customization options compared to the standard Shopify software, and Plus merchants can access exclusive applications like Shopify Flow for workflow automation, Shopify Audiences for AI-powered marketing, and Shopify Wholesale for business-to-business (B2B) commerce.
The company is successfully growing upmarket with its high-end software. Plus merchants accounted for 33% of monthly recurring revenue in the fourth quarter, up from 29% in the prior year. That bodes well for the future for two reasons. First, Plus makes Shopify relevant to larger businesses. Second, it allows Shopify merchants to engage in wholesale commerce, which more than doubles its addressable market. For instance, B2B e-commerce sales in the U.S. alone are expected to increase at 10.2% annually to reach $2.5 trillion by 2026, according to eMarketer.
Shopify is simplifying logistics (and deepening its moat)
The Shopify Fulfillment Network (SFN) is an ecosystem of warehouses, carriers, and last-mile providers that will simplify logistics for Shopify merchants. The company made great progress on the SFN last year. It partnered with freight specialist Flexport to help merchants inbound inventory quickly and cost effectively. Shopify also acquired Deliverr, a fulfillment technology company that already offers logistics services to merchants on Amazon, Etsy, and Walmart. Its network management software leans on artificial intelligence to allocate inventory and route orders, which should make the SFN more efficient.
Shopify will continue to ramp its logistics services this year, and the associated expenses will undoubtedly be a headwind to profitability. But the long-term benefits appear to outweigh the near-term costs. The SFN will make Shopify even more compelling by simplifying three phases of the supply chain: inbounding freight from suppliers, distributing inventory across warehouses, and fulfilling orders for customers.
Once complete, the SFN will allow merchants to guarantee rapid delivery to U.S. buyers across a variety of sales channels, including online marketplaces, social media storefronts, and direct-to-consumer websites. No other commerce company offers that kind of flexibility.
Shopify stock is trading at a reasonable price
Currently, Shopify stock trades at 9.9 times sales, a bargain compared to its three-year average of 34.3. More importantly, that price looks quite reasonable given Shopify's strong position in a large and growing market. For that reason, now is a great time to buy this growth stock.
