Shopify's (SHOP 2.75%) stock performance has been a mixed bag since the company went public in 2015. Those who bought in at the start and have held on since then are sitting on a 2,220% gain. But the stock has also taken some steep drops along the way. Over the past 30 days, for instance, shares have lost one-fifth of their value.
What lies ahead for Shopify, operator of one of the world's largest e-commerce platforms? The answer isn't necessarily what you'd expect.
NASDAQ: SHOP
Key Data Points
This is what will happen to Shopify over the next year
Shopify has been on a roller-coaster from a stock price perspective. But its fundamental results have been much more consistent.
Take a look at Shopify's top line. The company has never had a quarter when revenue declined year over year. Its user count has also increased consistently. From a technology perspective, its service has only improved, with growing numbers of developers contributing to its functionality and, more recently, AI features introduced throughout its tech stack.
All of this makes sense when you look at the underlying growth trends. Global e-commerce revenue has increased consistently for more than a decade, and according to the U.S. Commerce Department's International Trade Administration, global online spending is forecast to grow at an annualized rate of around 11.2% between 2023 and 2027. Because Shopify operates a platform that allows anyone from entrepreneurs working out of their own homes to multibillion-dollar businesses to rapidly set up feature-packed online storefronts, it's directly benefiting from this rising tide.
It also benefits from one of the most powerful forces in the investing universe: network effects, which cause a product or service to get more valuable to each user as more people use it.
To illustrate, consider Visa and Mastercard. Between them, these two companies control more than 86% of the U.S. credit and debit card market. That's because merchants want to accept the payment methods that consumers are most likely to use, and consumers will favor the payment options that more merchants accept. The natural result of that is industry consolidation.
This dynamic is also playing out with Shopify, which currently has a 28% market share for e-commerce platforms in the U.S. Its second-largest competitor -- WooCommerce -- commands only 17% of the market, with a host of platforms rounding out the remainder. Over time, businesses that are benefiting from network effects tend to grow larger, gobbling up even more market share. Expect the same to happen with Shopify. By many measures, it already has a heavy tech lead over the competition and can afford to spend heavily on adding new functionality, especially as AI goes mainstream. Put simply, expect Shopify's competitive advantages to strengthen in the years to come.
So where will Shopify be one year from now? From a business perspective, it will likely be stronger, with higher revenues, greater tech capabilities, and a more powerful hold over its market.
But what will happen to the stock price?
SHOP PS Ratio data by YCharts.
Will Shopify's stock price rise over the next 12 months?
Predicting where Shopify will be as a business one year from now is relatively easy. Predicting where its stock price will be is another story. Sure, its revenues have been on a consistent upward trajectory for years, but the valuations investors have put on that revenue stream have changed dramatically.
In 2015, for example, Shopify shares were priced at 20 times sales. By 2016, they were priced at just 10 times sales. Then, in 2020, the company's valuation soared to 60 times sales. Today, it again trades at roughly 10 times sales.
Some of these valuation swings were catalyzed by shifts in Shopify's annual revenue growth rate. Sure, its revenue has headed higher year after year, but the rates at which sales have grown have not been consistent.
Will there be more such swings to come? Absolutely. But Shopify is targeting an underlying market that's expected to grow by double-digit percentage rates for years to come. Plus, it has a heavy lead on the competition, which should help it attract an even larger market share over time.
No one can know for sure what Shopify's stock price will be one year from now. But we do know that today, its valuation in terms of the price-to-sales ratio is historically cheap. And we know that the business will likely be stronger next year and in the years after that. If you're willing and able to be patient through the ups and downs, expect Shopify to remain a lucrative long-term investment.
