Shopify Benefitting from Tailwinds of eCommerce Penetration, Says Analyst

Shares of Shopify (NYSE: SHOP) have recently reached its multi-year lows, losing half of its market capitalization over the last year.

This is despite the fact that “Shopify nearly tripled revenue, more than doubled GMV and the Shopify team, and the number of merchants using Shopify is nearly twice as big as 2019 levels,” as highlighted by Shopify President Harley Finkelstein during the earnings call on Feb 16.

There are a host of factors that could be pulling the stock down: the end of its “hyper-growth” phase during the pandemic years on resumption of physical stores; outlook below expectations; absence of government stimulus; growing inflation putting pressure on consumers’ budget; and macro and geo-political risks.

Investors are very much concerned about the slowdown in hyper growth seen during the pandemic years visible in the company’s outlook. The company expected slower revenue growth in the first half of the year.

To boost its revenues, Shopify is now focused on international expansion and the creation of an integrated e-commerce model that focuses on logistics and warehouses, spending a significant amount on a network of fulfilment centers.

Notably, the company plans to reinvest its profits and will incur a capital expenditure of $200 million in 2022, with an incremental $1 billion expected in the next two years.

The big question is: are investors’ looking forward to the real, long-term growth embedded in Shopify, or are they only focussing on the slowdown in growth and margin compression due to increased CAPEX?

Let us take a deeper look at the stock.

The Roadmap Ahead

In terms of gross merchandise volume (GMV), Shopify was one of the biggest beneficiaries of the pandemic as world consumption moved online. In 2020, Shopify’s GMV jumped a whopping 96% to $120 billion, followed by another 47% increase in 2021. In fact, GMV almost tripled from $61 billion in 2019 to $175 billion in FY21.

Notably, in FY2021, Shopify maintained its second position in terms of e-commerce sales with a 10.3% market share in the U.S., right after Amazon (AMZN) at 41% and ahead of Walmart (WMT) at 6%.

However, there is a huge gap between Amazon and Shopify’s market share, leaving ample room for Shopify to capture the same as it continues to expand its merchant base and help merchants consolidate their vendors.

In fact, the company’s revenue growth in Q4 was still higher than the pre-COVID levels, on a two-year stack basis.

Last week, Wells Fargo analyst Jeff Cantwell initiated coverage on Shopify with a Buy rating and a price target of $834 (38.27% upside potential).

Cantwell believes that the company deserves to trade at premium valuation to its peers within the Fintech space given “SHOP’s positioning as a unique disruptor, its strong growth profile, and its attractive opportunity globally”.

Cantwell highlights that Shopify has a substantial scope for growth with over $160 billion total marketable opportunity (TAM) in revenue and global retail volume worth $25 trillion.

The analyst foresees increased adoption of balance, capital, fulfillment, markets, and physical POS that would further “drive expansion in Shopify’s merchant base, improved MRR and take rate metrics, and naturally, growth in Subscription Solutions and Merchant Solutions revenue.”

Cantwell stated that “shares have historically traded as high as 47x EV/Sales, but have declined recently on broader sector risk-off. We believe as macro conditions stabilize and SHOP’s strong, above-peer financial performance manifests, this will drive multiple expansion and share price appreciation.”

On TipRanks, Shopify stock commands a Moderate Buy consensus rating based on 14 Buys and 13 Holds. As for price targets, the average Shopify stock price forecast of $982.44 implies almost 62.85% upside potential from the current level.

Key Takeaway

Shopify has a stalwart position in the e-commerce space and should benefit from the tailwinds of rising e-commerce penetration and digital commerce transformation with its impressive platform of products and services, earning it the second position after Amazon.

Fintechs like Shopify are focusing on vendor consolidation to further expand its merchant base. The company’s capital expenditure and international expansion plans are moves in the right direction with the aim of gaining substantial market share in the years to come.

Investors may consider the long-term story and make the most of the current price levels, which look extremely attractive at current valuations.

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