This e-commerce company is doing better, making the future brighter.
On June 29, Shopify (SHOP 1.90%) finished the 10-for-1 stock split. Although many investors presumably hoped the circumstance would result in a recovery, the share price has fallen consistently since the split. Of course, the effect can take time to manifest. Splits reduce the share price, making equities more accessible to regular investors. However, the current state of the economy and excessive inflation may be driving many investors away.
That stated, neither the worth of a company nor performance indicators like sales or cash flow are actually affected by stock splits. So, a split is not enough reason to purchase Shopify shares. Instead, here are three arguments for why Shopify is a good investment right now.
- Shopify is leading in a vast market.
Shopify makes commerce simpler. Its portfolio of software, financial services, and hardware is a great help for merchants in managing a business through traditional (physical) and emerging channels (online/digital). This includes well-known online stores like Amazon and social media sites such as TikTok, but it also includes websites that sell directly to consumers (DTC).
Well, this is a big deal. DTC business models give companies more influence over the buying process, enabling them to strengthen bonds with their clients. D2C merchants are becoming more popular with consumers as a result. According to eMarketer, 64 percent of customers would regularly purchase directly from brands this year, up from 49 percent in 2019.
More generally, Shopify is the top e-commerce software provider in terms of user happiness and market visibility because of its strong brand reputation and diverse product offering. In fact, its platform was the driving force behind 10.3% of American e-commerce transactions from 2021 to 2019, with up to 5.9%. The market share leader is only Amazon.
The first-quarter earnings of Shopify upset many investors. Consumer spending was affected by high inflation, and the business was up against the stiff competition. Revenue increased by 110 percent over the year in the first quarter of 2021 and only by 22 percent in the first quarter of 2022. In addition, as Shopify continued to make aggressive investments in expansion, increased operating costs led to GAAP (generally accepted accounting principles) losses on the bottom line.
Nevertheless, the business increased its market share in the USA for the traditional (physical) and emerging commerce (digital), and it continued to produce strong financial results over a more extended period.
Shareholders have enough reason to anticipate that Shopify’s growth will increase again in the upcoming years. The company estimates that there is a $160 billion market opportunity for both small and medium-sized businesses, and management is putting this market opportunity into practice.
- Shopify has an effective expansion plan.
Shopify is attempting to grow globally. The company has added financing and shipping services to Canada, the UK, and Australia since the pandemic began, as well as payment options in two more European regions, bringing the total number of nations served up to 17. These initiatives are slowly paying off as time goes by. The U.S. contributed 64.5% of revenue in 2018, from 68.4% in the year 2019.
Additionally, Shopify is committed to product innovation. It recently unveiled a more advanced retail point-of-sale system created especially for omnichannel merchants (integrating both online and offline sales). It also introduced the Shop mobile app, a tool for interacting with customers that enable users to browse suggested products, add to cart, and monitor shipments.
The availability of Shopify’s rapid checkout option (Shop Pay) to non-Shopify businesses on Instagram, Facebook, Google, and other Meta Platforms may be the most interesting development. However, that action has been done before. MercadoLibre made the same approach with its payment options, Mercado Pago, and the business has had phenomenal growth with off-marketplace businesses. If Shopify experiences comparable results, it might further accelerate its growth.
The Shopify Fulfillment Network (SFN) is the company’s most ambitious undertaking. Deliverr, a delivery service provider, was most recently purchased by the firm for $2.1 billion. To simplify logistics for retailers, Shopify will combine its own warehouse automation technologies with the predictive software of Deliverr, last-mile partners, and a network of warehouses. The SFN will eventually allow businesses to offer one-day and two-day delivery throughout the United States.
Margin pressure will initially result from the investments necessary to launch the SFN. However, over time, the SFN will help Shopify stand out, allowing D2C retailers to compete more directly with the popular Amazon and its extensive logistics network.
- Shopify’s price is reasonable.
Shopify’s stock price has fallen by 80% from its high as a result of investors shunning riskier growth businesses due to macroeconomic uncertainties. The stock is currently trading at 8.9 times revenues as a result. That seems reasonable, and compared to the average of 30.4 times sales in a five-year, it is a complete steal. Given the business’s current momentum, this growth stock is a must-buy.
Takeaway
Buying Shopify shares now can lead to a brighter future that no one aside from a wise investor sees coming. However, you still have to consider whether it is a suitable investment for you. So you still have to study its market and future.
