Shopify(SHOP.us) has been no exception as concerns about a Fed rate hike and conflict between Russia and Ukraine have weighed on U.S. stocks recently. In its fourth-quarter results, the company said it expects revenue growth in 2022 to be lower than last year. After the pandemic accelerated consumer demand for Shopify’s services last year, it’s not hard for investors to expect revenue to come under pressure as lockdown measures are gradually eased. Combined, Shopify’s stock is down 59% so far this year, which raises the question: Should investors buy the company now?
As retail industry sustainable development to digital, more companies are turning to electric business channels in order to promote business growth, and now, as a leader in the field of electric commercial software, the duration of the Shopify long-term growth trends may be longer than investors have thought, although in recent years, the stock has been achieved impressive gains, but the future may remain strong growth trend. For long-term investors, Loft Capital Management believes the recent sell-off has made the stock more attractive, while long-term fundamentals suggest three reasons to ignore the short-term noise.
1. The growth story continues
Revenue growth is expected to slow in 2022, but according to Zhitong Caijing APP, Shopify is still widely believed to maintain relatively strong growth. Currently, consensus analysts expect Shopify to report annual sales of $6.1 billion this year, up 31% from a year earlier; Earnings before interest, tax, depreciation and amortization (EBITDA) are expected to grow 57% to $698 million in 2022; Still, profits are expected to take a hit — analysts expect earnings per share of $3.54, down 45% from $6.41 in 2021.
No one can predict exactly what will happen in the next few years, but Shopify’s business seems to be on a clear upward trajectory as well. Analysts expect revenue to rise to $16.1 billion by 2025, with an average annual growth rate of 28%; Earnings per share will also jump to $12.43, 94% higher than 2021 adjusted eps.
Given the shift in online retail, expectations for strong growth aren’t really that surprising. With global e-commerce sales expected to reach $5 trillion by 2022 and $6 trillion by 2024, Shopify, as an e-commerce giant, stands to reap significant benefits over the next decade. In addition, the company’s management is focused on improving the entire platform, such as opening up the TikTok shopping service, Spotify channels, and launching Shop Pay Installments, new projects that demonstrate Shopify’s commitment to further innovation. So far, the company’s growth story remains extraordinary, but it is far from over.
2. Strong e-commerce moat
Shopify’s moat has widened in recent years. As of September 2021, Shopify controlled 29% of the e-commerce software market, followed by WooCommerce Checkout and Wix Stores(WiIS.us) with 23% and 14%, respectively, according to statistics firm Statista. In U.S. e-commerce retail sales, Amazon (AMZN) leads the industry with 39% market share, while Shopify is in second place with nearly 9%.
Shopify also has a very rich and extensive partner ecosystem. The company already works with major global brands such as Kraft Heinz (KHC.US), Whole Foods Market (WFM), PepsiCo (PEP.us), and Tesla (TLA.us), and together has more than 43,000 partners. Shopify’s moat is also showing up in the numbers — in the fourth quarter, the company’s business solutions revenue and monthly recurring revenue (MRR) grew 47% and 23%, respectively, exceeding $1 billion and $100 million for the first time in a quarter, to $1.03 billion and $102 million. Management cited the addition of merchants as the main driver, and investors can anticipate a significant increase in the number of Shopify partners and merchants over the next few years.
3. Valuations are back to normal
In November 2021, Shopify was trading at nearly 50 times price-to-sales as its stock hit an all-time high. In the months that followed, Shopify was trading at 14 times price-to-sales, nearly triple its five-year average of 27.5 times. Shopify still appears to be trading at a premium to rivals such as BigCommerce(BigC.us), Oracle (ORCL.us) and Wix. As the chart below shows, Shopify’s 14 times price-to-sales ratio is more than double its peer’s median 5.5 times, perhaps indicating that the stock has more room to fall.
However, it’s hard to predict when the stock will bottom out, but Loft Capital Management thinks it makes sense to buy Shopify now. Shopify will eventually become a well-run business and provide patient investors with strong long-term returns, the agency believes. Shopify’s management has previously said the company has a potential market size of $153 billion. Loft Capital Management thinks that if Shopify can maintain a 15% market share — half its current U.S. market share — it could generate $22.95 billion in annual revenue, which would be 398 percent higher than the company’s last fiscal year. Based on a 30% future EBITDA margin model, Shopify’s annual EBITDA would reach $6.885 billion, and at 20 times EV/EBITDA, the company would have an enterprise value of $137.7 billion, 77% higher than its current enterprise value.
Conclusion
Shopify is a great business, but is currently facing the impact of short-term factors. The company’s growth could hit some near-term setbacks as epideme-driven demand weakens, which also means Shopify’s stock price could continue to fall in the coming quarters. In the long run, however, investors who ignore temporary headwinds and focus on fundamentals can still expect significant returns. With the stock trading at five-year lows, Loft Capital Management believes Shopify deserves investors’ attention.
