You don't have to identify the hottest trend or company to be a successful investor. Instead, you can invest in the company behind many businesses. Shopify (SHOP 1.11%) is one of those companies for small and medium-sized businesses.
Shopify's tools empower these businesses to compete with the retail giants; the 2023 Black Friday and Cyber Monday sales are evidence of that. So, if you want to invest in the real winner of this year's holiday sales, look at Shopify.
Shopify's clients excelled over the Black Friday weekend
The gold standard for Black Friday online sales statistics is Adobe Analytics, which reported that Cyber Week (Thanksgiving Day to Cyber Monday) sales were $38 billion, up 7.8% year over year. But that's overall, and Shopify stores did much better than the crowd.
From Black Friday to Cyber Monday, Shopify merchants sold over $9.3 billion in products, an increase of 24% year over year. While that's not a direct comparison, it is conservative to say that about a quarter of all online shopping done on Thanksgiving weekend went through a Shopify store.
That's an incredible market share, and with Shopify representing much smaller businesses, it's also a bit of a feel-good story.
But that should only add to the Shopify investment thesis, as it presents a compelling investment opportunity.
Shopify's ecosystem also includes in-person point-of-sales (POS) systems, business-to-business offerings, and resources to sell products globally.
This all adds up to a company that should be crushing it with strong financials.
Shopify has a strong business, but you must pay up to own it
Shopify's financials are also quite strong, with revenue rising 25% year over year to $1.7 billion in the third quarter. Most of this growth came from its merchant solutions, which generate revenue from merchandise sales and Shopify Payments.
Shopify takes a bit of the purchase price from each transaction on its website. This toll booth model allows Shopify to succeed as its merchants succeed. When orders are run through Shopify Payments, Shopify also makes more, as it doesn't need to pay another payment processor. Growth of this product is critical, and with the share of orders that utilized Shopify Payments rising from 54% to 58% this year, it shows the company is doing a good job at capturing this opportunity.
Profitability has been elusive for Shopify throughout its life, but it posted an operating profit in Q3 of $122 million, or a 7% margin. This is a key trend as Shopify is at the maturity level where it must consistently deliver profits to shareholders.
Still, it hasn't been profitable over the past 12 months, so any valuation metrics that utilize profits from a trailing earnings perspective are skewed. If you look at Shopify's price-to-sales valuation, you can see that it has started recovering after crashing in 2021.
SHOP PS Ratio data by YCharts
But 14 times sales is still a high price for a company like Shopify, as its gross margin is around 50%, whereas many software companies that demand this kind of premium have gross margins of around 80%.
As a result, Shopify is a very expensive stock to invest in, but it's also a best-in-class company. These stocks are rarely on sale, and often, investors have to pay a bit of a premium to own them. However, after a few years of business results, the premium can be worth it.
I think Shopify falls into this category, and investors should scoop up shares of Shopify with the mindset of holding for at least five years.
