Artificial intelligence (AI) has the potential to bring big changes to the global economy. Goldman Sachs says generative AI alone could increase gross domestic product by about $7 trillion over the next decade, and Ark Invest analysts believe the productivity gains from AI software could increase labor output by $56 trillion by 2030.
Many businesses will benefit from that trend. Some of them are obvious. For instance, Nvidia GPUs are synonymous with AI infrastructure, and the company is reinforcing its competitive position with AI cloud services. But some businesses will benefit in less obvious ways. Shopify (SHOP 0.56%) is a great example. The stock currently trades down 66%, but the company is well positioned to capitalize on the growing prevalence of e-commerce, and it's applying AI across its business to create value for buyers and sellers.
Here's what investors should know about this growth stock.
How Shopify uses artificial intelligence (AI)
Readers may not associate Shopify with AI, but the Canadian commerce company recently rolled out a number of AI products. For instance, Merlin is a machine-learning platform that supports several internal and external use cases, from behind-the-scenes fraud detection and revenue predictions to merchant product categorization and buyer recommendation systems. The company also added an intelligent chatbot (Shop.ai) to its mobile app in March. The chatbot is powered by the same AI models as ChatGPT, and it serves as a shopping assistant for consumers.
Additionally, Shopify Audiences is a marketing software that uses machine learning to build and export audiences (i.e., lists of potential customers) to Pinterest, Facebook and Instagram by Meta Platforms, and Google by Alphabet, where they are used to run targeted ad campaigns. Shopify Audiences is exclusive to Shopify Plus, the company's high-end commerce platform designed for larger brands. The Audiences software is a key reason merchants upgrade to Plus, according to management, and that bodes well for Shopify. Its commerce software is commonplace among small businesses, but expanding upmarket represents a significant growth opportunity.
The investment thesis for Shopify
AI products like Merlin, Audiences, and Shop.ai make Shopify incrementally more compelling for buyers and sellers, but they represent a single bullet point in a much broader investment thesis. Investors need to keep the big picture in mind.
Shopify is a turnkey solution for commerce. Its software allows merchants to manage sales across physical and digital channels from a single dashboard, including online marketplaces like Amazon, social media like Instagram and Facebook by Meta Platforms, and direct-to-consumer websites. Shopify also provides adjacent services for financing, payments, logistics, and more.
Few companies (if any) provide merchants with the same level of flexibility and support. That advantage has made Shopify the market leader in e-commerce and omnichannel commerce software, and that puts the company in a good spot. According to industry experts, retail e-commerce sales will increase by 14% annually through 2030, and wholesale e-commerce sales will increase by 20% annually over the same period.
The future looks bright for Shopify
Shopify reported lackluster financial results last year. Revenue growth slowed as high inflation chewed away at consumer spending, and profitability vanished as the company continued to invest in its logistics business and product development. But the company regained some momentum in the first quarter, beating Wall Street's expectations on the top and bottom lines. Revenue rose 25% to $1.5 billion and Shopify reported $100 million in cash from operations, up from negative $25 million in the prior year.
Looking ahead, sales growth could certainly accelerate as economic conditions improve, and the company should have no trouble growing cash flow quickly. Shopify plans to sell its logistics business to Flexport before the end of the second quarter. That move will not only eliminate a capital-intensive portion of the business, but it will also allow Shopify to focus resources on its core competency: building software that simplifies commerce. Meanwhile, Flexport will become its official logistics partner, meaning merchants will still have access to affordable freight, fulfillment, and delivery services.
In short, Shopify enjoys a strong competitive position in a quickly growing industry, it's reinforcing that position with AI software products, and management is making smart decisions. That hints at a bright future for the company and its shareholders, especially at its present valuation. Share currently trade at 12.5 times sales, a discount to the three-year average of 31.7 times sales. That's why this AI growth stock is worth buying.
