Shopify ( SHOP 4.55% ) Shopify is a major e-commerce platform globally, allowing individuals or businesses to create online stores through its software and services. Despite its significant value of nearly $90 billion and being publicly traded for almost ten years, Shopify is no longer considered a hidden treasure. However, the company has experienced a decrease in popularity among investors in recent years.
The stock reached its highest point in 2022 due to the growth driven by the pandemic, but has since fallen by more than 60%.
Despite the negative outlook, there are six compelling reasons to invest in Shopify stock without delay.
Contents
1. The concept of network effects as described in a textbook
A company can have various competitive advantages. Shopify has built up. The benefits or advantages that a product or service gains as more people use it. In its business structure, a network effect occurs when the value of a product or service increases as more individuals utilize it. For instance, Shopify has around 2 million users, ranging from individual entrepreneurs to large companies. This significant user base requires third-party businesses interested in working with these users to create compatible integrations and applications for the Shopify platform.
Currently, Shopify’s app store boasts over 13,000 applications. The lack of equivalent third-party assistance may pose challenges for other companies in delivering a comparable user experience. This advantage extends to data collection as well, as Shopify can access a vast amount of merchant and transaction data, providing insights that smaller rivals lack. With an increasing number of merchants utilizing Shopify, its platform grows in strength. Consequently, as Shopify improves, more merchants are drawn to its services.
A business model that is favorable to merchants.
Shopify faces competition from other players in the e-commerce industry, such as a major online retail company. Amazon Amazon offers a platform for merchants to sell their products, but it has been criticized for not always prioritizing the interests of these sellers. Despite the initial appeal of accessing Amazon’s vast marketplace, there have been concerns raised about Amazon’s practices. Allegations against Amazon include manipulating pricing, giving preferential treatment to certain sellers, and directly competing with merchants by introducing similar products at lower prices.
In contrast, Shopify operates as a platform solely for products and services without competing with its customers. The company thrives when its merchants do well, distinguishing it from other e-commerce platforms and making it a popular choice for many businesses.
The beginning stages of online commerce
Consumer spending makes up a significant portion of the worldwide economy. However, eMarketer reports that e-commerce has only made slight inroads so far.
- 15% of the sales in North America retail sector
- 11% of the countries in the Asia-Pacific region, not including China
- One-tenth of the combined regions of Europe, the Middle East, and Africa.
Shopify’s potential market size increased to $849 billion last year, with the company currently catering to only 2% of that market.
A business model that does not rely heavily on owning physical assets.
Every company has its flaws. Shopify made a significant investment of $2.1 billion in 2022 to purchase a logistics startup named Deliverr in order to enhance its competitiveness in fulfilling orders, especially against rivals like Amazon. Nonetheless, the management changed direction the next year and offloaded its logistics resources to a different company, leading to a substantial impairment cost.
Although it was a costly error, the decision by management to change direction is likely to benefit the company. Embracing an asset-light business approach has enhanced Shopify’s performance. free cash flow In 2019, the company managed to convert only 1% of its revenue into cash. However, its margin saw an improvement to 13% in the following year. It reached 16% during the second quarter. A company that produces a significant amount of free cash flow has the option to distribute more funds to its shareholders through dividends or buybacks, or can reinvest in expansion without the need to take on debt.
Anticipating significant growth in the future.
Shopify is positioned to experience steady growth ahead. diversifying its range of products and services Furthermore, in addition to the overall positive trend in e-commerce, analysts anticipate that Shopify will achieve a minimum of 20% growth in revenue each year until 2026. They also predict a 33% increase in earnings per share on an annual basis for the next three to five years.
A decreasing worth
It is now necessary to provide additional information regarding the growth prospects of Shopify. Currently, the company’s stock is being traded at a price-to-earnings ratio (P/E) With a P/E ratio of 67, the company’s valuation is considered high, especially for a rapidly growing company like Shopify. However, at the beginning of 2024, the stock had a forward P/E ratio exceeding 100, which has been steadily decreasing over the course of the year.
Considering the growth of Shopify’s ecosystem and the large untapped potential in the e-commerce market, investors can envision the company expanding to meet its long-term valuation.
