Given the stock's massive meltdown during the first half of 2022, it would be easy to conclude Shopify (SHOP -5.62%) is just another tech stock bust. Investors were stoked by the premise in the midst of the coronavirus pandemic. With the major lockdowns over and businesses returning to normal, however, the luster of its online store-building schtick seems to be fading.
Take a closer look though. While the COVID-19 pandemic may have put a spotlight on the company, Shopify was growing with or without the pandemic-prompted boost. That's not changed in the meantime. The only thing that's changed is the stock's price -- shares are much cheaper now than they were a year and a half ago.
And that's your opportunity to jump in -- before the market corrects its mistake.
Capitalizing on the inevitable opportunity
Shopify provides would-be online merchants with the tools needed to build their own e-commerce presence. That's why shares performed heroically during the early days of the coronavirus outbreak. Consumers were largely unable to shop in stores. They went online as an alternative. Shopify helped make it happen.
There's far more to Shopify's story, however, than the pandemic.
If you want to fully understand Shopify's roots, you have to understand what Amazon (AMZN -1.07%) is and what it isn't. While Amazon is clearly the leader of the North American e-commerce market, it's also guilty of all the predictable trappings of being such a powerhouse. Namely, Amazon not only inherently pits third-party sellers against one another, but it also directly competes with these sellers on some fronts. These sellers still choose to utilize Amazon simply because the platform's reach is enormous. They need it.
As time has passed, though, increasingly web-savvy businesses have partnered with ever-improving e-commerce solutions providers. Now it makes enough fiscal sense for merchants to at least try an in-house alternative to Amazon. And several recognizable brand names have done just that. Office goods retailer Staples, sock company Bombas, and Kraft Heinz are all users of Shopify's tools. All told, Shopify facilitated nearly $50 billion worth of sales last quarter alone, up 18% year over year, extending a long-standing streak of double-digit growth. The company's making profit progress, too, albeit not quite as consistently as sales are growing.
The company's growth to date, however, only scratches the surface of its ultimate opportunity.
The tide's only beginning to rise
Quick -- guess how much of the United States' retail spending is done online.
Given how often we see Amazon's delivery vans traveling our neighborhood's roads or how often the average U.S. consumer finds a package at their front door (a Power Reviews poll taken late last year indicates that three-fourths of U.S. consumers make an online purchase at least once per week), it wouldn't be crazy to presume half of our consumerism is taking place via the web these days.
But that guess isn't even close. For all the hype e-commerce generates, the Federal Reserve reports only around 15% of the nation's retail spending is done online. The rest is still done in-store. A big chunk of that remaining 85%, therefore, is up for grabs by companies able to complete a sale online and then fulfill a delivery.
To be clear, some of that 85% of retail spending will never shift from offline to online, since brick-and-mortar shopping can be something of an experience itself; some of it has to be done in person.
Even if only half of that offline spending moves online though, that's market growth on the order of $2 trillion in the U.S. alone.
To this end, Insider Intelligence believes the United States' e-commerce market will grow from last year's $1 trillion to more than $1.7 trillion as soon as 2027, led by purchases of apparel, furniture, and electronics, areas where Shopify has already demonstrated it can effectively help bring a brand online. And the opportunity is just as compelling overseas. Insider Intelligence further reports that the worldwide e-commerce market should grow from last year's $5.5 trillion to $7.4 trillion in 2025, en route to what some forecasters believe could reach and even eclipse $10 trillion by 2030.
Amazon isn't in a position to make that happen by itself. To get there, a bunch of consumer-facing companies are going to have to build their own online shopping solutions. Many of them are going to punt that work to Shopify.
Buying Shopify is the best bet on the megatrend
Shopify's not the only e-commerce game in town. BigCommerce is making waves, too. A few of the bigger and better funded would-be online stores will opt to build their own e-commerce presence from scratch. Still others will be content to stick with Amazon as a sales platform. Interested investors should keep a close eye on these competitive forces.
But Shopify doesn't need to win all of this prospective business to pay off for shareholders. Even a fraction of this potential growth could be a windfall for Shopify, and by extension, for its investors.
Most important to prospective shareholders right now, however, is the fact that it's already been winning more than its fair share of this growth, and is expected to keep doing so at least through 2027.
Data source: Thomson Reuters. Chart by author.
Bottom line? Don't sweat last year's meltdown. Instead, use it to your advantage. Just don't tarry. The stock's not only been recovering from that sell-off, but the recovery rally is accelerating. It looks like the market's starting to understand the bigger picture here.
