Artificial intelligence is on the rise, and many investors are looking for stocks that will capitalize on the trend. There are some software stocks with direct exposure, but perhaps the best place to look is where the benefits of AI aren't as easily recognized.
There's one overlooked AI powerhouse in particular that should use the technology to create large value for investors, even if the market hasn't caught on just yet.
Shopify: A wonderful business even without AI
Shopify (SHOP 1.25%) is a wonderful stock even before diving into its AI upside. The company launched in 2006 after a pair of entrepreneurs attempted to start an online storefront for their snowboarding business. Disappointed with the lack of technology options for creating digital storefronts, one of the entrepreneurs with experience in coding decided to build his own. The result was the Shopify e-commerce platform: a one-stop shop for individuals and businesses looking to start selling online.
It turns out that Shopify's founders weren't the only ones dissatisfied with the market's options for building an online store. More than 1 million stores now run on the company's platform. Last quarter, Shopify-powered stores processed more than $75 billion in purchases.
According to data compiled by Statista, Shopify currently has a 28% market share for e-commerce platforms in the U.S. That is, there's nearly a one-third chance that a person looking to set up an online storefront will choose Shopify. The next closest platform is WooCommerce, commanding a market share of just 17%.
SHOP Revenue (Quarterly) data by YCharts
The e-commerce market is a great industry to be exposed to in your investment portfolio. E-commerce sales worldwide are expected to grow at nearly 10% per year through at least 2029. Companies that ride this rising tide will win.
With a leading market share, Shopify is particularly primed to benefit from this trend. That's because its technology is a platform, meaning outside developers can build on top of it. If there's a feature you'd like to see on the platform, for instance, you can build it yourself and charge others a fee when they use this feature.
Hundreds of millions of dollars are paid to outside developers per year for their contributions. As it is the biggest e-commerce platform, developers flock to Shopify because it offers the best opportunity to make money selling to as many users as possible. Shopify, meanwhile, essentially has a distributed workforce thousands strong that it only needs to pay whenever a new feature is built and adopted.
This scale gives Shopify an enviable economic moat. Developers want to contribute to the largest platform possible to maximize profits. Users, meanwhile, want to use the most robust platform possible. With Shopify's sizable lead over the competition, these competitive advantages will only strengthen as time goes on. AI, it turns out, could put this advantage on steroids.
AI will put Shopify's competitive advantage on steroids
Because Shopify has attracted so many developers to its e-commerce platform, it should be a prime beneficiary of AI -- but don't just take my word for it. Morgan Stanley analysts recently listed Shopify as one of its biggest AI winners over the long term. Why?
Most importantly, Shopify will be able to integrate more AI features into its platform at a faster speed than any competitor. That's because its platform is most attractive for AI developers looking to launch e-commerce tools and features.
The company also has the funds and scale to launch its own internally developed AI features. Last year, for example, it launched Shopify Magic, which automates many time-consuming aspects of online retailing, like writing product descriptions, optimizing product photos, and chatting with customers.
"Our strategy involves integrating AI at the heart of our platform," Shopify President Harley Finkelstein stressed on the company's latest conference call, "simplifying the process for merchants to expand their businesses and adapt to the ever-evolving commerce landscape."
With Shopify's ability to out-invest the competition when it comes to both internally and externally developed AI solutions, this vision is very achievable. While quarterly revenue growth rates have fallen recently, the continued integration of AI into its platform should help keep growth rates at Shopify elevated for longer than the market anticipates.
