Shopify: Right Company At The Wrong Price (NYSE:SHOP)

Investment Thesis

Due to the shutdown of retail markets brought on by the COVID-19 epidemic, major brands and small businesses established online platforms to sell goods, which led to a surge in Shopify’s (NYSE:SHOP) e-commerce business. However, as the economy started to pick up, retail outlets began gaining back their customers, resulting in the company losing its momentum and currently selling at roughly 64% below where it was a year ago. The existing market environment was made worse by inflation and potential recession indicators, which hampered the expansion of the e-commerce business.

Additionally, growing inflation increased operating costs. Operating costs increased 52.6% year over year to $845.9 million in the third quarter, resulting in an operating loss of $45.1 million. This and the move by Amazon (AMZN) to release tools that let people utilize their platform for payment and delivery make many investors wonder if Shopify was a trend that has finished or if it could still be a good investment.

Shopify’s TAM Is Growing

Future expansion in the e-commerce industry will have a significant impact on Shopify. Nowadays, it appears that online purchasing is commonplace. It is practical for customers since they can visit several retailers with the click of a few buttons and have orders delivered to their front doors comparatively quickly and frequently without having to make the slightest effort.

For enterprises, e-commerce is also practical, as retailers can draw potential clients who are not close to a single physical store, as opposed to just serving customers in a relatively restricted geographic region. Even cross-border commerce is possible thanks to a variety of delivery choices.

All these benefits will help e-commerce, which has not yet fully taken over, continue to flourish. According to researchers, the industry accounted for 24.0% of all retail transactions globally in 2022, up from the 18.8% it represented in 2021. For the following three years, this suggests a CAGR of around 10%, which should only be advantageous to businesses like Shopify.

Shopify’s revenue grew to $1.37 billion in the third quarter, up nearly 22% over the same period in the previous year. This is a lower top-line growth rate than what the company’s stockholders are used to, which likely also played a role in the stock’s underwhelming performance over the previous 12 months. However, investors should remember that the company’s growth rate is still anticipated to continue at roughly the same pace for the next eight years, and is still considered to be quite high.

Shopify’s Moat

Business organizations will try to make a presence in this market because of how lucrative online shopping is. To occupy a niche, Shopify will need to develop a competitive advantage. Fortunately, the business has successfully accomplished that thanks to its software-as-a-service (SAAS) approach. Shopify enjoys significant switching costs, which aids in the retention of the majority of its clients.

Clients are less likely to leave when switching to a rival is more expensive. Spending time and money on an online storefront is necessary, and the longer it has been in business, the more likely a brand is linked to it that devoted customers identify with. Giving it all up means the merchant will waste time, money, and perhaps even the brand that they have worked so hard to establish.

However, Shopify is planning to not only gain from the e-commerce expanding market but also branch out to new ones in order to fuel its future growth.

Shopify In The NFT Market

Recently, Shopify enabled its millions of merchants to start creating, producing, and selling NFTs.

The revenue in the NFTs market is expected to reach $3.5 billion by the end of 2023 and increase at a yearly growth rate of 22.82% for the following four years, and Shopify is ready to capture a piece of this pie.

Shopify’s Competitive Advantages

Even though cryptocurrencies are extensively traded and used, many consumers are still unaware of how to set up a wallet or conduct transactions. Shopify has a huge competitive advantage over every other NFT marketplace as most NFT marketplaces don’t enable customers to buy with fiat money. In addition to making it easier for those who wish to purchase NFTs with credit cards, Shopify now supports a wider variety of blockchains, which could draw more creators and provide crypto-savvy customers with more payment alternatives.

The foundation of all NFTs is blockchain technology. There are numerous distinct blockchains, though. Ethereum (ETH-USD) is the most well-known blockchain in the NFT industry, although it is losing ground to other blockchains like Flow and Polygon. The majority of NFT markets only accept one or two blockchains. This implies that you must sell your NFT for the corresponding cryptocurrency in addition to minting it on a specific blockchain.

NFTs are supported by Shopify on a number of different blockchains, including Near, Flow, Polygon, and Ethereum. In addition to enabling vendors to diversify their NFT products, more options also benefit buyers. This puts Shopify in a powerful position and if the company executes properly, I believe that this move could help it boost its future growth even more.

Valuation

Without considering Shopify’s stock valuation, no investing decision can be efficient. Ultimately, it does not matter whether a firm has strong financials and a promising future if it cannot be purchased at a reasonable price.

Shopify has a P/S ratio of less than 10, and although this is near its all-time lows, it is still more than twice as high as its competitors.

The business has been in operation for nearly two decades, but it has only been profitable in 2020 and 2021 when demand for its services increased, and is now once again unprofitable. A reason for this is that the company reinvests in its future expansion, but at some point, investors will want to see a return on their investment, and Shopify has not yet demonstrated its ability to sustain profitability. Notwithstanding this, analysts anticipate that the company will break even this year and remain profitable going forward. However, even if this happens, the corporation is projected to have an EPS of $1.66 by 2028. This suggests a forward P/E ratio of 23.43 for the company six years from now, which I regard to also be a reasonable current P/E ratio for 2028. This suggests that the future growth of the company is more than priced in the current stock price, despite a decline of more than 60% from a year ago. Based on the valuation, I believe the stock price of the company has more room to fall before it becomes a bargain.

Conclusion

In conclusion, Shopify is a market-leading force in its sector. It has millions of dedicated clients and is always enhancing its platform to provide them with greater value. It has a huge growth runway ahead of it and is likely to return to profitability soon. I also recognize the potential in the NFT market and would consider purchasing Shopify stock at the right price. Unfortunately, the price at which it is currently trading is irrational in my opinion, so I would not initiate a position at the moment, but I will continue to monitor this stock and possibly make it part of my portfolio if it was to fall by half.