Shopify Stock: A Business Owner’s Perspective (NYSE: SHOP)
As a business owner, who myself served thousands of customers through Shopify and started my entrepreneurial journey on the platform in 2018 when Shopify Inc. (NYSE: SHOP) was still a small business, I can’t be quite grateful for the services they rendered to me. So you might want to keep that in mind because I might be biased towards the company.
That being said, in this article, I will explain through the lens of a business owner why the stock price presents significant opportunities for long-term investors after a 75% drop in the stock price. action, bearing in mind the results of the first quarter to come.
How I ended up with Shopify
Shopify is an online e-commerce platform for online stores and retail businesses. When I started my very first eCommerce business in 2018, I was looking for the best and most efficient way to launch my business which was selling B2C products primarily to customers in North America. I worked with Shopify for 2 years after which I decided to move platforms to WooCommerce due to high transaction fees with Stripe/Paypal (PYPL) and Shopify integration which together took almost 5 % transaction fees.
However, it was a decision that I ended up deeply regretting. Since all the other alternatives I was looking for just didn’t have the versatility offered by Shopify. Either their customer service was too poor, or the interface was too confusing, they had no integration with other developers/companies/apps, etc. So, a few months later, I decided to migrate to Shopify, despite the higher cost. A few years later, Shopify launched Shopify Payments in Belgium, which solved the high transaction fees, and I’ve never looked back since.
After almost 5 years of seeing and using Shopify’s products and services, and talking to many other business owners and entrepreneurs, I can testify that they too can’t live without the platform and its integrations.
Because I’ve worked with Shopify for years and years, I can witness first-hand their customer service over the years and offer a unique perspective on what I’ve seen. Shopify has, without a doubt, one of the fastest, most constructive, and insightful customer service experiences I’ve ever had across all departments.
It was like taking a chapter from Amazon’s (AMZN) book on “customer obsession”. I can even recount a full conversation with support in 2020 where one of the reps gave feedback and actually converted into a customer after I contacted them about having issues with Shopify Payments before a launch.
Shopify USP and Market Share
Some might argue that Shopify’s stock price has fallen so much because it’s in the late stages of growth, due to less exponential revenue growth. For example, between 2013 and 2015, Shopify experienced triple-digit growth, nearly 100% YoY, compared to 57.43% YoY in 2021. Critics also like to cite the high P/S ratio of 12, 85 or an expected P/E ratio of 185.19. .
I generally think these multiples are justified, just as Tesla’s high/negative P/E ratio (TSLA) was justified, and offset by the nature of its strong revenue growth + margin expansion/product expansion. I firmly believe that Shopify will likely continue to gain market share by first allocating capital, building a network, and only later monetizing this vast customer base, as Amazon has done by leveraging other more profitable products. Amazon, for example, this week reported an operating margin of 35.3% for its AWS segment.
To give investors additional context, I think Shopify is in the early stages of growth. E-commerce retail sales represent a global market of US$4.92 billion, which is expected to grow to US$7.39 billion over the next 5 years, at a CAGR of 10.70% for all of industry in the world. Shopify is aggressively gaining market share, with revenue growth of 79.62% CAGR between 2012 and 2021.
As far as I can tell, Shopify’s unique selling point remains its robust ecosystem, which offers flexibility in terms of inventory management, developer-built apps, convenient user interface, good customer support, and online store integration. online and offline (Retail POS). This ecosystem should grow further as Shopify moves towards robust fulfillment integration, perhaps even with the acquisition of Deliverr.
These types of integrations will further tie business owners to the platform and lower the bar for new business owners to start a business with Shopify. Meanwhile, Shopify is also expanding its financial and artificial reality side of the business, with opportunities to compete with not just Amazon, but also Google (GOOG) Payments and Apple (AAPL) Pay, introducing their own ecosystem.
Finances before profits
Since I am not just a small business owner, it is of course of the utmost importance to look at the financial side of the business, taking into account the 10-K, because I think that in Ultimately, every business valuation comes down to free cash flow and enterprise value.
The company’s outlook has turned very bleak, as evidenced by its share price, which has fallen more than 65% in the past year. On top of that, even for the first quarter, Street Estimates predicts a significant drop in revenue, to $1.24 billion, from $1.38 billion in the fourth quarter of 2021. Analysts even predict a sharp drop in net income and FCF, likely due to higher operating costs and new investments.
Net income is expected to drop to $83.55M in Q1 2021 from $172.84 in Q4 2021. FCF is expected to plunge into negative territory, -$49.65 in Q1 2022 from $234.48 in Q4 2021 .
Two analysts from Loop Capital and Wedbush also lowered their price targets this week. Wedbush lowered its price target to $630, down from $937. Loop Capital sees it more bearish and lowered its price target to $460, down from $660, making it the most bearish price target on the street right now.
The move came days after shares of rival Amazon fell more than 15%, after reporting an unexpected first-quarter loss and the weakest revenue growth since 2001. As for Shopify’s forecast, you can see in the chart below that analysts got it notoriously wrong in Shopify. EPS and revenue guidance, underestimating its revenue target by 10% lower.
Why Shopify is cheap
In 5 years, in 2027, I expect Shopify to continue its aggressive revenue growth, growing at a CAGR of 45% and reaching nearly $30 billion in revenue. In January 2022, NYU Stern reported that the P/S ratio for online retail was 3.35. I expect Shopify to continue to show strong revenue growth through 2030, and therefore a higher P/S ratio closer to 4. With a P/S ratio of 4 and revenue of 30 billion dollars, Shopify would trade at a market capitalization of $120 billion. or $953.12 per share on a non-diluted basis.
This would represent a CAGR of 15.43% in price growth, which provides plenty of excess alpha over broad-based benchmarks. Likewise, this price target does not take into account significant growth in gross margins or operating margins, although Shopify has seen significant progress in margin growth. Shopify’s operating margins were 6.5% in 2021, compared to -8.9% in 2019, despite strong revenue growth, as previously mentioned.
Investors should also recognize that Shopify is still in the early stages of growth, compared to competitors such as Amazon, and is therefore more likely to show higher operating costs that can be attributed to one-time investments.
The actual Shopify stock price could be well above $953.12 in 2027, if management is able to sustain growth, gain market share, and continue to deliver innovative products to increase margins. such as the Shop app and additional services such as Shopify POS and a fulfillment network extension.
All stocks have downsides
As I cover innovative stocks, I have a long-term investment horizon. Although Shopify may experience a rebound after reporting earnings, which provides short-term gains, I expect Shopify to experience increased volatility. As mentioned above, since the stock is still trading at a high price-to-earnings ratio, the stock could fall even further if the macro backdrop of high inflation and the Fed’s woes become even more precarious.
As Ben Graham said:
In the short term, the market is a voting machine, but in the long term it is a weighing machine.
In terms of competition, Shopify faces both large competitors like Amazon, Walmart (WMT), eBay (EBAY), Apple, and smaller competitors in its niche like Wix.com (WIX), Square Online ( SQ) and Squarespace (SQSP).
Where is Shopify headed?
From my perspective, I think Shopify has hit rock bottom. This view comes as I believe uncertainty is at its highest and the outlook is the most bearish in a long time on macro factors such as: an inverted yield curve, strong inflation growth, questionable Fed policies and slowing global GDP growth. . This is particularly reflected, for example, in the Bull-Bear Spread at -42.92%, the worst sentiment in decades and even worse than the 2008 financial crisis, which is inherently bullish.
Over the years, every successful business I’ve started wouldn’t have been possible without Shopify’s flexibility and integrations, as many other entrepreneurs have told me they couldn’t run their businesses without the platform. form, the same way consumers are locked into the Apple ecosystem.
I think investors are underestimating the potential of Shopify and the growing ecosystem that provides value to almost every small and medium business in the world, and their ability to monetize this ecosystem and increase their margins.