Focusing too much on the market's short-term volatility can cause investors to forget that broader equities tend to deliver strong returns over the long run. Zooming out always helps -- when looking at a chart of the performance of major indexes over long periods, even corrections look like relatively minor blips.
It's also helpful to pick out companies that have performed well for a decade or more, but still look likely to deliver monster returns to investors. E-commerce specialist Shopify (SHOP -1.24%) is a great example. Since its initial public offering 10 years ago, the company's shares have soared by 3,470%. Yet Shopify still has plenty of room to run.
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Why Shopify has performed so well
Shopify's co-founder and current CEO, Tobias Lütke, created the company because he wanted to sell snowboards online, but he thought existing options to create online storefronts were inadequate. He built his own software thanks to his background in computer programming.
SHOP Total Return Level data by YCharts
In other words, Shopify came up with the proverbial better mousetrap and has improved it since its inception. The Shopify of today is fully adapted to modern online commerce. Merchants have everything they need on a single platform, from a basic online store to payment processing, inventory management, cross-selling capabilities across major social media websites, and an app store that helps them customize even further through thousands of options.
Shopify isn't the only company that offers these services, but it is a leader in its niche. The company now has a more than 12% share of the U.S. e-commerce market by gross merchandise volume -- this number has increased from the 10% it had in 2022. Shopify's success has translated to excellent financial performance. Revenue has grown rapidly, and while it is still not consistently profitable, it has improved its free cash flow.
SHOP Revenue (Annual) data by YCharts
Those who have already benefited from Shopify's run might be tempted to take their profits and leave, while investors still on the fence might think the best is in the rearview mirror for the company. But the stock can still deliver market-beating returns.
There is plenty of upside left
Companies that perform well over the long run tend to have several traits, including a strong moat and significant growth potential in their industry. Shopify checks both of these boxes. Consider the company's switching costs. Building an online storefront from scratch requires time, money, and energy. It's even harder to attract customers to this storefront through rigorous marketing efforts. After putting in all that work, merchants won't want to switch to a competitor.
There are options to migrate stores to different hosts, but even that demands some effort business owners won't want to put in unless absolutely necessary, and that's besides the potential disruption to their day-to-day activities the process could bring. Shopify's switching costs aren't the only source of its moat. Its app store also benefits from the network effect.
These two grant the company a significant competitive edge. This is why Shopify continues to perform well despite stiff competition in the e-commerce field and has gained market share in the past two years.
There is also the growth potential in e-commerce. While online transactions seem ubiquitous, they had captured just 16.4% of total retail sales in the U.S. as of the fourth quarter. Analysts project that the market will continue expanding at a good clip, and it's not hard to understand why.
E-commerce helps shatter geographical barriers for buyers and sellers, thereby multiplying both sides' pool of potential trading partners. It's hard to know precisely when e-commerce will peak, but it hasn't yet, and that grants Shopify plenty of white space. Expect the company to continue delivering strong revenue growth through the next decade while eventually becoming profitable. And through it all, Shopify should still produce above-average market returns.
