Shopify (SHOP 1.11%) was one of the market's hottest growth stocks in 2021. The Canadian e-commerce service provider's shares closed at a record high of $169.06 on Nov. 19 that year at the apex of the buying frenzy in growth and meme stocks.
But today, Shopify trades 56% lower at about $75 a share. The bulls retreated as its growth cooled off, its margin shrank, and rising rates compressed its valuations. Yet despite all of those challenges, it might be a great buy for four simple reasons.
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1. It's still primed for long-term growth
Shopify's self-service e-commerce tools enable merchants to build the own online marketplaces, process payments, fulfill orders, and manage their own marketing campaigns. That one-stop shop is an appealing option for sellers who don't want to join a massive third-party marketplace such as Amazon.
Many of Shopify's merchants sell their products on social media platforms including Meta Platforms' Facebook and Instagram, Pinterest, and ByteDance's TikTok. That approach gives the company a firm foothold in the nascent "social commerce" market, which Grand View Research estimates will expand a compound annual growth rate of 32% from 2023 to 2030 as social media platforms pull more shoppers away from traditional online marketplaces.
Shopify also locks sellers into its own ecosystem with its Shop Pay payments platform and its Shop App, which unites its local sellers in a centralized app for consumers. It's also growing overseas, simplifying cross-border transactions with its Markets Pro platform, and expanding its Shopify Plus service for high-volume merchants. All of those strategies should drive its long-term growth as the e-commerce market expands.
2. Its revenue growth is stabilizing
Shopify's revenue soared 86% in 2020 as the pandemic drove more merchants to sell their products online. Its revenue rose another 57% in 2021, even as the pandemic passed and more brick-and-mortar stores reopened. But in 2022, its revenue increased only 21% as inflation curbed consumer spending.
That slowdown drove many investors to dump Shopify's stock. But for 2023, analysts expect its revenue to rise 20% as the macro environment stabilizes. For 2024, they expect 18% revenue growth -- but that slight slowdown will mainly be caused by the sale of its lower-margin logistics division in mid-2023 instead of any major macro challenges.
3. Its margins are improving
The sale of its logistics division, which it significantly expanded through its acquisitions of 6 River Systems in 2019 and Deliverr in 2022, represented a surprising reversal of its plans to build a first-party logistics network. Nevertheless, it was a necessary move that should stabilize its operating margins.
In the past, Shopify's expansion of its logistics business, along with its elevated cloud hosting and marketing costs, had reduced its adjusted operating margin from 16% in 2021 to 0% in 2022. However, analysts expect that figure to rise to 11% in 2023 and 16% in 2024 as it abandons its logistics strategy.
That stabilization counters the bearish notion that Shopify will spend itself into a hole as its sales growth slows down. Analysts expect its adjusted earnings to jump more than ninefold in 2023 and grow another 66% in 2024.
4. Its stock looks reasonably valued
At its all-time high, Shopify's enterprise value reached $205.7 billion, or 37 times the revenue it went on to generate in 2022. That nosebleed valuation set it up for a steep drop when its revenue growth decelerated and its margins contracted.
But today, Shopify has an enterprise value of $91.9 billion, which is 12 times the revenue it's expected to generate in 2024. At $75, it still trades at 129 next year's earnings, but that multiple could quickly contract as its profitability improves.
Shopify isn't a screaming bargain yet, but its valuations look more sustainable than they did during the peak of the growth stock rally. Simply put, I believe investors who believe Shopify's business will continue to flourish in the shadow of Amazon and other e-commerce giants should accumulate some shares right now before the bulls rush back.
