Shopify Stock Analysis 🛒
Shopify (NYSE: SHOP) has been one of my best investments since I bought it in 2017 at $8 a share, it's now at $72.
Shopify (NYSE: SHOP) has been one of my best investments since I bought it in 2017 at $8 a share, it's now at $72.
Since then, it’s gone on to become one of the most iconic companies in the ecommerce space and a popular buy amongst retail and institutional investors alike. It’s up 103% so far in 2023, way ahead of the Nasdaq’s 41%.
Here’s a look at their business and why I won’t be selling the stock anytime soon.
Business Model
Since its launch in 2004, Shopify has become one of the most popular and widely used e-commerce platforms, with over 4.36 million live websites currently using Shopify in 175 countries.
Shopify's business model is centered around providing a comprehensive e-commerce platform that enables businesses of all sizes to set up, manage, and scale their online stores.
In short, Shopify offers a subscription-based software service that gives users the tools necessary to create and customize digital storefronts, manage inventory, process payments, and handle logistics.
It can be used by all sorts of businesses, from small entrepreneurs to larger enterprises (such as Nestle and Tesla), thanks to its scalability and ease of use.
Shopify also offers a range of apps and integrations through its Shopify App Store. There are currently about 8000 apps available in the Shopify store developed both by Shopify and third-party developers.
These apps extend the functionality of the platform, allowing merchants to add features such as customer reviews, loyalty programs, and email marketing tools.
Shopify takes a percentage of sales from third-party app subscriptions and its payment processing service, Shopify Payments, which integrates into the platform to offer a streamlined checkout process.
In June 2023, Shopify completed the sale of Shopify Logistics to Flexport, a tech-driven global logistics platform. The sale was a reversal for Shopify which has spent years building out its own logistics operations.
This sale means that Shopify can focus on its own software platform and that Flexport will be Shopify’s official logistics provider.
However, Shopify still owns Shopify Shipping, which offers discounted rates with major carriers, and the Shopify Fulfillment Network, a network of centers designed to store, pack, and ship products for Shopify merchants.
Shopify is maintaining its lead in the ecommerce software space whilst offering an all-encompassing e-commerce logistics solution to merchants on its platform.
In reference to Star Wars, CEO, Tobi Lütke, has said Shopify is “arming the rebels" against Amazon’s empire.
Recent Performance
Shopify, as with most tech companies, benefitted hugely from the pandemic lockdowns and a lot of its growth was brought forward.
Despite this, the company’s growth has remained impressive even as the world has opened back up and brick and mortar shopping has come back.
Shopify has about 11,600 direct employees as of December 2022 and over 700,000 indirect employees including app developers and designers.
Revenue Growth
Shopify recorded $1.7 billion in revenue during Q3 2023, a 25.5% increase over the $1.36 billion it managed in Q3 2022.
Revenue for full year 2022 was $5.6 billion, 21.4% higher than 2021.
Shopify’s revenue growth over the last 3 and 5 years has averaged 39.3% and 47.5% respectively. Impressive numbers, but numbers that it will need to maintain if it’s to justify its high valuation.
Customer Growth and Retention
As of September 2023, Shopify stores had about 2.1 million daily active users, roughly a 10% share of the global ecommerce market and 28% of the US market.
By the end of this year, more than 700 million people will have purchased something from an online store powered by Shopify, up from just 28 million in 2014.
In 2022, about 2.1 million people used Shopify to create an online store, up from 1.7 million in 2021. Shopify however doesn’t track the number of unique people behind its stores so one person could in theory own a few.
Unfortunately for the business, it’s recently had problems with keeping merchants on the platform.
In October 2022, Canadian newspaper, The Globe and Mail, found that only 34% of Shopify stores last a year and the average store in 2021 lasted just 143 days.
More recent data is hard to find but it’s likely to have improved in my opinion. A lot of the merchant churn was probably caused by people setting up stores during the lockdowns and then abandoning them when things opened back up.
Still, it’s an important thing to think about when considering whether to invest in the company or not.
Earnings
Much like its revenue growth, Shopify’s earnings growth over the past five years has also been impressive.
Diluted earnings per share has grown 77% and 70% over the last three and five years respectively.
Net income in 2021, Shopify’s first year of profitability, was $2.9 billion.
Net loss in 2022 was $3.46 billion but this was almost entirely down to unrealized losses on other investments.
Two of the biggest were Shopify’s investment in private fintech company, Affirm, which accounted for about $1.1 billion of the unrealized loss, and its investment in ecommerce company, Global-e Online, which accounted for another $581 million.
Operating expenses also grew from $2.2 billion in 2021 to $3.6 billion in 2022. Spending on research and development went up by about $700 million and marketing spend rose by about $300 million.
It seems like this spending has paid off in 2023 though, with revenue up 25% and gross profit up 36% year over year.
Valuation Multiples
As ever with tech companies, Shopify, by any reasonable metric is highly valued.
As it was unprofitable last year (largely thanks to unrealized losses), using a PE ratio to value the company won’t work.
But its PE ratio at the end of 2021 was about 60, extremely high but unfortunately, you generally have to pay up to buy good companies.
It’s also trading at 14 times 2022 sales - just for context, the average tech company trades at about 5.8 times sales.
Risks
Competition
One of the primary risks when thinking about investing in Shopify is market competition. The e-commerce platform industry is highly competitive, with major players like Amazon, the WooCommerce WordPress plugin and newer entrants constantly innovating and trying to capture market share.
Shopify's success depends significantly on its ability to stay ahead in terms of technology, user experience, and pricing. Until now, it has been able to do so, but any failure to innovate or adapt to changing market trends and consumer preferences could impact its popularity and financial performance.
Valuation
Another risk factor is Shopify's valuation and growth expectations. As mentioned, it’s highly valued, largely thanks to its historic growth rate.
A high valuation reflects investor confidence and growth potential but also sets a high bar for performance. If Shopify's growth slows down or if it fails to meet the market's lofty expectations, there could be a substantial correction in its stock price.
For me, these are the two main risks to consider when thinking about investing in the company, but Shopify itself mentions more on page 39 of its 2022 annual report.
Conclusion
Shopify is a unique business and presents an opportunity for investors to gain exposure to the rapidly evolving e-commerce landscape.
It’s demonstrated remarkable growth, innovation, and resilience, catering to a diverse range of merchants and consumers globally.
Shopify recently recently announced record sales of $9.3 billion in the recent holiday season, 24% up from the same period in 2022.
However, the competitive nature of the e-commerce platform market, coupled with Shopify's high valuation and external economic factors, are considerations that should not be overlooked.
Disclaimer: Please note that the content provided here, including any suggestions, ideas, and commentary, is for informational purposes only and does not constitute financial, investment, or other professional advice.