This month, Morgan Stanley strategist Edward Stanley revealed the investment firm's top high-conviction stock picks that will directly benefit from the rise of artificial intelligence (AI). While Stanley admitted that we are still in the "experimental" phase of AI, "the margin expansion in these names should be meaningful over the second half of 2024 and into 2025."
There were some familiar names on Morgan Stanley's list, including CrowdStrike, Meta Platforms, Tesla, and Snowflake. One of the firm's top picks, however, might surprise you.
Shopify is a growth machine
If you're familiar with Shopify (SHOP 1.61%), you likely think of it as a tool for building websites. More specifically, the company specializes in helping people and businesses launch e-commerce websites. Previously, those wishing to build a digital storefront needed to do a lot of the heavy lifting themselves. With Shopify, anyone can start selling online within minutes, with design, inventory management, payment processing, and advertising tools already integrated and available with a few clicks.
Soon after Shopify's initial launch in 2006, it became undeniably clear that there was a huge market for its services. Within a decade, the company went from handling $0 in online transactions to billions of dollars' worth every year. In 2018, the company's gross merchandise volume -- the total dollar value of orders processed through Shopify-powered stores -- hit $41.1 billion. That figure has since surpassed $200 billion. Put simply, Shopify is growing rapidly, fueled by rising demand for its all-in-one e-commerce solution.
SHOP Revenue (TTM) data by YCharts
A secret AI marketplace
You might ask: Isn't it fairly easy to replicate Shopify's business model? After all, other site-building businesses like Wix already have multibillion-dollar valuations. The truth is that it will be very hard to catch up to Shopify's lead because it has cultivated a developer marketplace that will benefit from long-term network effects.
Remember when we were talking about how Shopify's platform integrates everything a person needs to begin selling online? The company itself didn't build all of those tools. Instead, it operates a developer marketplace, similar to Apple's App Store. Any developer anywhere in the world can start building new features into Shopify's platform. Users can then add these capabilities to their website in seconds, generating income for the developer.
With a 28% market share of e-commerce platforms in the U.S., Shopify has the largest, most capable developer marketplace in the business. That's great news, considering these types of marketplaces generate strong positive feedback loops. What that means is that the larger these marketplaces get, the stronger they become. Users want to use the platform with the most tools and features. Developers, meanwhile, want to sell to the biggest user base. These factors create a natural long-term advantage for Shopify.
When it comes to the strength of an e-commerce solution, AI tools will become a growing consideration for users. AI can be used for a variety of tools, including personalized product recommendations, chatbots and virtual assistants, fraud detection and prevention, inventory management, and dynamic pricing. Whichever platform offers more of these tools at a higher quality will win. With the industry's largest developer marketplace, Shopify has a strong head start when it comes to e-commerce's AI revolution.
Is now the time to buy Shopify stock?
It's not hard to see why Morgan Stanley analysts are enthusiastic about Shopify stock. The company has a best-in-class platform targeting a huge addressable market. It has a proven history of growth and an early head start when it comes to building AI features into its offering. But is now the time to buy the stock?
At a price-to-sales ratio of 14.5, it's easy to argue that Shopify shares are simply too expensive despite the company's strong growth appeal. If you're in for the long term, however, you can worry less about swallowing the pricey upfront multiple. Shopify's addressable market is essentially the world's entire e-commerce industry. It's not difficult to foresee this company company commanding a $1 trillion market cap one day. In 2017, for instance, Shopify stock traded at a similar 14.5 times sales. Since then, however, sales have ballooned from around $500 million to more than $7 billion, a reality that makes that 14.5 times sales multiple look pretty cheap in hindsight.
Is Shopify stock expensive? Absolutely. But this is a high-quality business with growth tailwinds that will persist for decades. Morgan Stanley analysts are correct in calling this stock a high-conviction pick.
