Stock splits can help investors zero in on high-quality businesses. Not because they have any material significance to the company or its operations, but because stock splits tend to follow on the heels of substantial and sustained share price appreciation, which itself typically correlates with solid fundamentals.
Investors can see that pattern in the stock splits detailed below. Every company listed cultivated a strong competitive position, and that quality translated into tremendous share price appreciation.
- Apple: 4-for-1 split in August 2020.
- Alphabet: 20-for-1 split in July 2022.
- Amazon: 20-for-1 split in June 2022.
- Monster Beverage: 2-for-1 split in March 2023.
- Nvidia: 4-for-1 split July 2021.
- Palo Alto Networks: 3-for-1 split in September 2022.
- Shopify (SHOP 1.61%): 10-for-1 split in June 2022.
- Tesla: 3-for-1 split in August 2022.
Shopify shareholders saw returns north of 265% in the last five years, which was part of the justification for its split. Even better, this Canadian commerce company retains strong prospects for future growth. Here's why this stock-split stock is a great buy-and-hold candidate for your portfolio.
Shopify is a market leader in commerce software
Shopify offers a turnkey solution for omnichannel commerce. Its software helps businesses manage sales across physical locations and digital stores, including marketplaces, social media, and branded websites. Shopify also provides adjacent services needed to start, market, and grow a business, including solutions for payment processing, financing, and logistics.
Its broad ecosystem not only simplifies commerce, but it also gives businesses the flexibility to manage their brands across multiple sales channels. That separates Shopify from marketplace operators, and it has propelled the company to the forefront of the retail industry. Shopify is the second-largest e-commerce company in the U.S. and the global market leader in e-commerce and omnichannel commerce software.
Shopify is growing quickly across both business segments
Shopify breaks its business into two revenue streams: subscription solutions and merchant solutions. The former includes fees on platform subscriptions, point-of-sale software subscriptions, and Shopify App Store sales. The latter includes transaction fees assessed as a percentage of gross merchandise volume (GMV), and fees on merchant services like payment processing.
The chart below shows quarterly subscription solutions revenue (dark green) and quarterly merchant solutions revenue (light green). It also provides the three-year compound annual growth rate (CAGR) for both revenue streams.
Chart by Author.
As detailed above, Shopify continued to churn out strong results in the second quarter despite challenging macroeconomic conditions. Revenue increased 31% to $1.7 billion, reflecting 21% growth in subscription solutions and 35% growth in merchant solutions. And non-GAAP net income improved to $178 million, up from a loss of $32 million in the prior year.
Yet Shopify has hardly tapped its tremendous market opportunity.
Shopify is chasing a multi-trillion-dollar market opportunity
The e-commerce software market is expected to compound at 12% annually to reach $14.5 billion by 2031, while retail e-commerce sales are expected to increase at 8% annually to reach $8 trillion by 2030, according to Straits Research.
Shopify has a strong foothold in both markets, but the company continues to develop new products in an effort to gain share. Here are a few recent examples:
- Shopify Magic: A generative artificial intelligence (AI) tool that can automate commerce workflows like running sales reports, writing product descriptions, and redesigning storefronts.
- Shopify Bill Pay: An expense management solution that enables merchants to pay suppliers directly from their Shopify dashboards.
- Shopify Marketplace Connect: A centralized hub from which merchants can sell products on all major marketplaces -- including Amazon, Etsy, and Walmart -- while managing and fulfilling orders through Shopify.
- Shopify Markets Pro: A suite of tools that simplify cross-border commerce by localizing language and pricing, calculating and remitting foreign taxes, and streamlining fulfillment and shipping for international orders.
Those products make Shopify incrementally more compelling to merchants of all sizes. But the company has also designed products specifically for larger enterprises. For instance, Shopify Plus is a full-stack commerce suite that features more sophisticated tools than its lower-tier subscriptions, including:
- Shopify Audiences: A marketing tool powered by machine learning that allows merchants to create and export campaign-targeting parameters to ad platforms like Meta Platforms' Facebook and Instagram, Alphabet's YouTube and Google Search, and Pinterest.
- B2B on Shopify: A suite of features that support wholesale e-commerce, putting Shopify in front of another tremendous market opportunity. Wholesale e-commerce sales are forecasted to increase by 20% annually to reach $33 trillion by 2030.
Here's the bottom line: The products detailed above could bring more merchants to Shopify, thereby increasing subscription solutions revenue. They could also boost GMV on the platform, both by drawing new merchants and engaging existing merchants, thereby increasing merchant solutions revenue.
Shopify stock trades at a reasonable price
To summarize, Shopify is the second-largest retail e-commerce company in the U.S., and it is the global leader in e-commerce software and omnichannel commerce software. Shopify also has a burgeoning opportunity in wholesale e-commerce. Investors can reasonably expect annual revenue growth in the high teens (at a minimum) for the foreseeable future.
Indeed, Morgan Stanley says Shopify could grow revenue at 19% annually over the next decade, which makes its current valuation of 10.9 times sales look cheap, especially when the three-year average is 26.8 times sales. That's why this growth stock is worth buying.
