This Canadian e-commerce company is up over 150% in the last year, but have investors missed the boat or is the best yet to come?
Shopify (NYSE: SHOP) is a Canadian e-commerce company that has had explosive returns since going public in 2015, up over 4,000% in that time. But is it too late to invest?
Bull Case
Shopify's mission is "making commerce better for everyone", encapsulating founder Tobias Lutke's vision from its early days as a snowboard company.
A visionary founder is a big positive, and Lutke is one of the best CEOs around, owning roughly 6.7% of the business. Insider ownership is a positive sign for investors as the owner's wealth is linked to the stock. On Glassdoor Shopify has 4.2 stars out of 5, and Lutke has an impressive 92% approval rating, indicating a positive company culture.
In Q4 of 2020, Shopify reported near triple-digit growth for the second consecutive quarter with revenue up 94% to $977.7 million. Gross merchandise volume was $41 billion and surpassed $120 billion for the year, increasing 96% year-over-year (YoY). Shopify reported a net income of $123.9 compared to $0.8 million the year prior and posted a full-year profit of $319.5 million. This profitability marks a change from 2019 and previous years where it was burning cash. Shopify also has a strong balance sheet boosted by a recent stock offering and currently has $6.39 billion in cash and cash equivalents.
Lutke stated that "Shopify has been about empowering merchants since it was founded" and is powering 1,749,000 globally as of December 2020. Its merchants operate in 175 countries, but over half of the businesses are based in North America. A common misconception among investors is that Shopify is only for small and medium businesses, but it also has some large clients with Shopify Plus, which had record client growth in 2020 as beverage giant Diageo and grocery chain ALDI came on board, adding to existing clients such as Nestle.
Shopify estimates that its total-addressable-market (TAM) is $78 billion for small and medium-sized businesses, which gives it room to grow despite its $144 billion market cap. When large businesses and Shopify Plus are factored in, this only expands the market opportunity. Shopify does not have a conflict of interest, unlike other e-commerce players such as Amazon, and therefore, is not facing regulatory challenges due to its business model.
Bear Case
Despite stellar growth, Shopify still comes with risks, including its valuation --it currently trades at a price to sales ratio of roughly 50x. Investors have factored in high growth rates for the foreseeable future, and management will need to execute to justify this valuation, but as revenue increases, it becomes harder to maintain these growth rates.
There is also ever-increasing competition in the space, with companies like Wix and WooCommerce providing similar solutions. Shopify will need to continue to innovate and empower merchants to stay ahead of the competition.
Another risk is that much of this growth has been fueled by COVID-19 and the switch to e-commerce. As the pandemic subsides and bricks-and-mortar stores open up, this may cause growth to slow.
So, Is It Too Late To Invest?
It is never too late to invest in a great company, and Shopify has all the hallmarks of one. A visionary CEO, a large TAM, and impressive growth rates suggest that it will continue to perform and reward shareholders. Although it has risks and may be volatile, it should continue to produce market-beating returns over the long run.
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