Shares of Shopify Inc (NYSE:SHOP) have struggled lately on fears of rising interest rates and heightened worries surrounding the ongoing Russia-Ukraine crisis. The company also released its fourth-quarter results in February and said it expects revenue growth to be lower in 2022 than last year. COVID-19 accelerated the need for Shopify‘s services as businesses turned to e-commerce software to help manage and grow their businesses during lockdown. As pandemic threats abate, investors can expect pressure to be put on Shopify’s revenue. Year-to-date, Shopify shares are down 59%, raising the question: should investors buy e-commerce stocks today?
As the retail industry continues to evolve digitally, more businesses will transition to e-commerce channels to facilitate their business. Shopify, which has earned a reputation as a leader in e-commerce software, allows anyone to create an online store and sell their products. Age-old growth trends tend to last much longer than we think, and while Shopify has seen an impressive recovery in recent years, the company’s future growth track remains robust. The latest Shopify stock sale has made the stock more attractive to long-term investors. It’s time to ignore the short-term noise and focus on the long-term fundamentals. Let’s discuss three reasons to consider buying Shopify today.
1. The story of continued growth
Revenue growth is expected to falter in 2022, but consensus estimates still call for a strong uptick. Analysts expect Shopify’s annual sales to hit $6.1 billion this year, translating to 31% year-over-year growth. The company’s EBITDA is expected to climb 57% in 2022 to $698 million. However, earnings are expected to take a hit – analysts are modeling EPS of $3.54/share, down 45% from $6.41/share in 2021.
It’s never easy to predict several years into the future, but Shopify’s business seems to be on a definite upward trend. Wall Street analysts expect the company’s revenue to expand to $16.1 billion by 2025, representing an average annualized growth of 28%. Earnings per share are also estimated to rise sharply to $12.43 by 2025, 94% higher than Shopify adjusted EPS reported in 2021.
I’m not surprised to see robust growth projections going forward given the paradigm shift to online retail. Globally, e-commerce sales are expected to reach $5 trillion in 2022 and $6 trillion by 2024. Currently sitting as an e-commerce juggernaut, Shopify is well positioned to capture a lot of value in the decade. future. Management is also focused on improving the overall platform – new ventures such as TikTok shopping, the Spotify channel and Shop Pay installments (a buy-it-now, pay-later service) show that Shopify is growing. committed to pursuing innovation. The company’s growth story has been amazing so far, but it’s not over yet. And it won’t be soon.
2. Solid e-commerce gap
Shopify’s moat has widened in recent years. According to Statista, the company controls 29% of the e-commerce software market as of September 2021. The next closest competitors are WooCommerce Checkout and Wix Stores (NASDAQ: WIX), which have market shares of 23% and 14%, respectively. Amazon (NASDAQ:AMZN) is the clear leader in US e-commerce retail sales, with a 39% market share. Shopify is second, however, accounting for almost 9% of online retail sales.
The company also has a very rich and extensive partner ecosystem. With more than 43,000 partners, the company works with huge global brands like Kraft Heinz (NASDAQ: KHC), Whole Foods Market, PepsiCo (NASDAQ: PEP) and Tesla (NASDAQ: TSLA). Shopify’s moat is also etched in the numbers – in the fourth quarter, Merchant Solutions revenue and the company’s monthly recurring revenue (MRR) rose 47% and 23% to $1.03 billion and $102 million. dollars, respectively. It’s the first time these metrics have topped $1 billion and $100 million in a single quarter, with management citing the addition of merchants as the primary cause. Investors should anticipate a surge in partnerships and merchants for Shopify in the coming years.
3. Shopify’s valuation has normalized
In November 2021, Shopify was trading at a P/S multiple of nearly 50x as the stock hit all-time highs. Fast forward a few months, the company is posting a P/S multiple of just 14x, nearly half of its five-year average of 27.5x. But when you compare Shopify’s P/S multiple to competitors like BigCommerce Inc (NASDAQ:BIGC), Oracle Inc (NYSE:ORCL), and Wix, the company is still trading at a premium. Looking at the chart below, you’ll notice that Shopify’s 14x P/S multiple is more than double that of its peer group median of 5.5x. This may indicate that Shopify has more room to fall; however, I am not trying to predict when the company will bottom out. I still think it’s reasonable to buy Shopify today, or at the very least start a position for those who don’t currently hold the stock. Ultimately, Shopify is a well-run business that will provide patient investors with lucrative returns over the long term.
Management estimates that the company has a total addressable market of $153 billion. If Shopify can retain 15% of the market – just half of what it has in the US today – then the company would generate $22.95 billion in annual revenue. That’s 398% more than the company’s revenue in its previous fiscal year. Modeling a future EBITDA margin of 30%, this would bring Shopify’s annual EBITDA to $6.885 billion. Using an EV/EBITDA multiple of 20x, I projected the company’s enterprise value to reach $137.7 billion, which is 77% higher than today’s EV. Over the long term, trying to determine what EV/EBITDA multiple a company will trade at is complex. The average EV/EBITDA multiple for online retail companies is 26x. Similarly, established tech companies like Apple Inc (NASDAQ:AAPL) and Microsoft Inc (NASDAQ:MSFT) are trading at EV/EBITDA multiples of 19x and 21x, respectively. So, I think my assumption of 20x EV/EBITDA is reasonable. Find out below how different market share and EBITDA margin estimates impact my enterprise value forecast when applying a 20x EV/EBITDA multiple.
Shopify is a big company currently facing challenges with short-term implications. As pandemic-driven demand declines, the company’s growth could experience short-term hiccups. Those able to ignore temporary headwinds and focus on the fundamentals could be rewarded significantly in the long run. It wouldn’t be surprising if Shopify’s shares continue to decline over the next few quarters. That said, the company is now trading at a five-year low, which I think should get the attention of savvy investors. I give Shopify a “buy” rating and advise investors to consider adding the stock to their long-term portfolios today.