Innovation creates new businesses that stock investors can capitalize on for gains. While credit for such opportunities often goes to the technology industry, investors may overlook the consumer sector.
However, they can benefit from the best of both worlds by fulfilling customer desires with technology. That potential market influence has made Shopify (SHOP 1.11%) my favorite growth stock, and it is likely not too late for new investors to capitalize on this opportunity.
Why Shopify?
On the surface, choosing a development platform for e-commerce websites may not sound like a game-changing opportunity. Amazon emerged as a pioneer in e-commerce decades ago. And even outside of the developed world, companies like Alibaba, MercadoLibre, and Sea Limited exhibit similar market leadership in their respective regions.
However, Statista forecasts a compound annual growth rate of 11% for global e-commerce through 2027. This constitutes enough growth for more businesses to capture.
Image source: Statista Digital Market Insights.
To this end, platforms like Shopify could function as an alternative to the Amazons of the world. Shopify enables small and medium-sized businesses to sell online without having to share profits with a seemingly dominant selling entity.
Moreover, the extent of Shopify's ecosystem gives it a competitive advantage over the numerous software companies with e-commerce platforms. Its ease of use means entrepreneurs without technical skills can set up and operate Shopify sales sites. It also gives these clients extensive tools for customization that most peers do not match.
Shopify's ecosystem also extends well beyond presenting sales items and processing orders. Shopify Payments can process financial transactions more efficiently, and Shopify Capital can help small businesses obtain funding. The company also helps with promoting sites via email and social media.
The company further expanded its functionality by developing a platform for larger and fast-growing retailers called Shopify Plus. This software facilitates a faster onboarding process and a wholesale channel service. Additionally, its inventory management capabilities extend to online and offline sales, offloading much of the technical difficulties of developing comparable in-house platforms.
Shopify by the numbers
However, Shopify pulled back from one potential competitive advantage earlier this year by selling its logistics business. Building that business proved costly, and by selling it, Shopify has drastically improved its financials.
In the first nine months of 2023, Shopify reported revenue of $4.9 billion, an improvement of 27% versus the same period in 2022.
Net losses came in at $515 million for the first three quarters of 2023, well under the $2.9 billion for the same timeframe in 2022. Additionally, Shopify reported $708 million in net income in the third quarter. If not for the $1.3 billion impairment charge from the sale of the logistics business, Shopify would have been profitable so far this year.
Investors have taken notice of this recovery, and the stock is up more than 110% over the last 12 months.
Admittedly, the likely return to profitability takes the forward price-to-earnings (P/E) ratio above 110. However, a high probability of rapid earnings growth could make that a misleading valuation measure. Furthermore, its price-to-sales (P/S) ratio comes in at about 15. While that makes Shopify a pricey stock, it has traded well above that level for most of its history, indicating that the sales multiple is more likely to rise than fall.
Consider Shopify stock
Ultimately, Shopify is my favorite growth stock because it leads the way in helping e-commerce businesses function without the Amazons of the world taking a cut.
Moreover, the company derives massive growth from a growing industry as customers turn to it for its ease of use and extensive ecosystem. As more businesses adopt e-commerce functionality, more of them will likely turn to Shopify. And the stock holds massive potential for driving outsized returns for investors, now that Shopify is free of the profit-killing logistics business.
