Shopify's (SHOP 1.11%) platform has been a go-to for merchants looking to set up an online storefront to expand their e-commerce presence. While online retail spending slowed significantly in 2022 as consumer spending dried up amid rising inflation, Shopify bounced back strong in 2023. Higher revenue growth pushed the stock up 124% for that year.
That said, Shopify's improving financial results led to the stock trading at an expensive valuation of 14 times trailing revenue. The company will have to execute almost flawlessly in 2024 to justify the premium.
We'll look at one factor helping Shopify's business in the short term before evaluating the shares' appeal compared other top growth stocks.
Shopify benefits from a key competitive advantage
Shopify has been a high-growth business in recent years, and that's not likely to change anytime soon. The company's revenue -- which comes from subscriptions to its platform and add-on services it calls merchant solutions (e.g., payment processing and capital lending) -- increased from $1.1 billion in 2018 to $6.6 billion through the third quarter of 2023 on a trailing-12-month basis.
Shopify serves well over 1 million merchants worldwide, but just in the U.S., the total gross merchandise volume across its customer base accounted for only 10% of U.S. e-commerce spending in 2022, so it still has a long runway for expansion.
In the third quarter, revenue climbed 25% year over year, driven primarily by growth in merchant solutions and Shopify Payments.It's notable that Shopify's revenue growth in 2023 was much higher than total e-commerce spending, which rose 9% last year to reach $1.137 trillion, according to eMarketer.
Shopify is benefiting from small businesses looking for financial assistance during a challenging retail environment. Shopify Capital issued $4.7 billion in loans from 2016 through 2022. This has been an invaluable service for businesses that may not be able to get a loan from a traditional bank.
Shopify succeeds when merchants succeed. It makes most of its revenue from merchant services, including Shopify Capital, payment processing, shipping and other services, with less than a third of its sales coming from subscriptions to its platform.
After more than a decade, Shopify has a lot of data that enables profitable lending decisions for merchants. Its ability to serve entrepreneurs where large banks would be afraid of losing money is a key advantage for Shopify and will provide a source of extra growth over the long term.
Other growth stocks offer better value than Shopify
Shopify's small penetration in the e-commerce market, as well as opportunities to bring more useful features to merchants, should keep revenue climbing at double-digit rates for a long time. It would make a great investment, but it's important to buy the stock at the right price.
If you're an existing shareholder sitting on gains, you may not want to sell shares of a growing business and pay capital gains taxes. But new investors might want to wait for a better entry price. Shopify currently trades for a price-to-sales ratio of 14, which is expensive compared to other comparable e-commerce and merchant services providers, such as Amazon, Etsy, and Toast (the Shopify of the restaurant industry).
Data by YCharts
Toast has been a high-growth business that is similar to Shopify but offers industry-specific merchant services for restaurants. It shows that Shopify is not without competition. This only reinforces the point that investors should wait for a better price before buying Shopify stock.
One reason the stock more than doubled last year was Shopify's lower valuation when growth expectations were muted amid a weakened retail environment. With other top stocks trading at significantly lower multiples of their revenue, Shopify doesn't offer enough relative value to justify an investment at these share prices.
