If you only had $100 to spend on at least one whole share of a company, which stock would you buy? There are plenty of options at that price. One could splurge on 20 or more shares of some penny stock. However, most of those aren't worth the trouble for investors focused on the long game. Thankfully, there are companies trading for less than $100 a share that look like attractive long-term options.
E-commerce specialist Shopify (SHOP 1.11%) deserves a spot on the shortlist of the best in this category, at least in my view. Let's find out why Shopify is such an excellent option for investors.
Shopify's latest financial results
Shopify's shares dropped after it released its fourth-quarter earnings report, although it is not immediately clear why.
At first glance, the company's results were strong and pointed to an overall improving business. Shopify's revenue increased by 24% year over year to $2.1 billion. The company's top line jumped by 30% compared to the year-ago period when accounting for the fact that since the fourth quarter of 2022, Shopify has divested its logistics business.
Gross merchandise volume (GMV), the total value of the orders conducted on its platform, was up 23% year over year to $75.1 billion.
Shopify's divestiture of its logistics operations is impacting profitability. In the quarter, gross profit, gross margin, operating profit, and free cash flow all saw solid increases. Though Shopify has never been consistently profitable as a publicly traded corporation, it seems to be moving in the right direction, something investors should appreciate.
Focusing on the long-term view
However, the company's first-quarter guidance was weak, a significant factor that likely prompted the sell-off following its latest quarterly update. This isn't the first time Shopify's guidance disappointed investors, and it almost certainly won't be the last.
The company may remain vulnerable to stock market sentiment and volatility in the next few months, especially considering its valuation. Shopify's forward price-to-sales ratio tops 11.5 -- well above the range where investors start feeling they are getting a real bargain, generally 2 and below.
SHOP PS Ratio (Forward) data by YCharts.
Richly valued growth stocks that fail to deliver the promise baked into their stock prices often suffer the consequences. That's what happened with Shopify. Still, investors should look beyond these issues and seek to answer a more fundamental question: What do Shopify's long-term prospects look like?
My view is that the company is one of the best picks to profit from the rapidly expanding e-commerce market. Consider, first, the breadth and depth of the company's services. Shopify makes it easy for merchants to start online storefronts from scratch. It provides a suite of comprehensive and complementary services and an app store with thousands of options that allow businesses to customize their online stores as they see fit.
Shopify also allows its clients to sell their products across social media platforms. In other words, the company built a service adapted to modern commerce. Second, Shopify's position in the market is already strong.
It has a 10% share of the e-commerce space (in terms of GMV) in the U.S. and 6% in Europe. Considering how competitive and crowded this industry is, that's pretty impressive. Third, Shopify arguably benefits from switching costs. Building a storefront from scratch takes time and money. Attracting thousands of customers to it is even more challenging. Having to start from the beginning is out of the question for most businesses.
While there are options to migrate stores from one platform to another, merchants will need an excellent reason to undergo this procedure. The numbers show that not only do merchants tend to stay with Shopify, they also tend to opt for more services. The company's attach rate -- a metric that measures to what extent merchants spend on the platform relative to GMV -- has generally increased. In the fourth quarter of 2018, it was at 2.45%. As of the fourth quarter of 2023, it had risen to 2.85%. Lastly, Shopify has a long runway for growth.
As of the fourth quarter, e-commerce sales in the U.S. accounted for just 15.6% of total retail sales. That number will almost certainly continue to rise in the long run. Shopify, a leader in the industry, should benefit. So, investors should look beyond the company's recent drop. Shares are trading for just under $77 apiece -- $100 gets you one of them with change left over. They should be worth much more than that in five years.
