The software-as-a-service space has been popular among investors because growth within that sector is expected to be massive over the next decade. Cloud-based software services often operate on a subscription basis, meaning that there’s a recurring revenue stream that doesn’t eat up a lot of marketing dollars. Also, once a company has signed on to a particular cloud-based system, switching costs are high so it’s also easier to retain customers. E-commerce payments platform Shopify Inc (US) (NYSE:SHOP) embodies all of those positives and, as a relatively small company with huge growth potential, SHOP stock is a great addition to your portfolio.
Sure, Shopify stock is expensive, but the firm’s triple digit gains so far this year are nothing compared to the growth you can expect over the next few years as it grows exponentially.
Shopify Is Building a Small Business Empire
Shopify’s e-commerce platform appeals to small and medium-sized businesses as a simple way to sell their goods and services online. The company offers merchants a one-stop shop in which they can easily manage and analyze their orders and payments but also keep tabs on inventory and interact with customers.
SHOP also makes it possible for customers to buy through a mobile browser, an important offering considering the growing number of people who prefer to make purchases on their smartphones.
Shopify has a lot of potential growth ahead when you consider the sheer number of small and medium-sized businesses out there that could be using SHOP’s services. While the massive market of merchants that it can cater to represents a huge growth opportunity, it’s the company’s improving service offerings that makes it worth considering.
Last year, Shopify’s average revenue per user was $1,243 — a 15% increase from 2015’s $1,077. This year, I’d expect to see an even larger jump as Shopify’s services outside of just e-commerce gain momentum.
Shopify now offers a point-of-sale system that merchants can use for in-person credit card purchases. On one hand, there’s some stiff competition in that space with Square Inc (NYSE:SQ), but SHOP has a competitive advantage in that merchants that already use Shopify have all of their transactions in one place.
Then there’s Shopify’s cash advance service, Shopify Capital. Merchants can get a bit of seed money to do things like hire staff and increase their marketing budgets.
On Tuesday, Shopify earnings are due out, and investors will be able to have a look at how per-user spend has been increasing and how well the firm’s new services are performing. If the firm is able to grow per-user revenue while still consistently picking up new users, investors can expect SHOP shares continue to deliver triple digit gains over the next few years.
Partnership Power for SHOP Stock
One of the things Shopify has done really well so far this year has been ensuring that its service covers every possible e-commerce transaction that a merchant might need. The fact that business owners can manage all of their transactions in one place is what gives Shopify a competitive edge, and the firm has made some pretty powerful partnerships recently that will ensure Shopify merchants have access to most major e-commerce platforms.
Shopify already allows merchants to make sales via Facebook Inc (NASADQ:FB) Messenger and on Amazon.com, Inc. (NASDAQ: AMZN), but it was the firm’s recent deal with eBay Inc (NASDAQ:EBAY) that really got people excited about SHOP stock.
eBay has been a go-to marketplace for small businesses for years, and now that Shopify is able to manage merchants’ eBay transactions through the Shopify dashboard, the site has become a boon rather than a competitor. eBay integration simply enhances Shopify’s value proposition and gives merchants another potential marketplace that can be easily managed from their existing account.
Help Me Help You
At the moment, Shopify’s strategic growth initiatives align perfectly with what small business owners are also working toward themselves. That kind of relationship is the stuff of dreams when it comes to keeping customers and convincing them to spend more.
When Shopify expands its marketplace options, merchants benefit because they are able to sell in a new way. When merchants grow, it gives Shopify more clout and more to manage. That means Shopify can roll out new offerings, which in turn benefit merchants by making it easier to manage their growing business.
It’s that give-and-take relationship that inspires confidence in Shopify’s growth potential going forward. Not only is SHOP helping itself every time it expands, but the firm is also further ingraining itself into its customers’ business, making it much harder for them to switch to a competing service someday.
The Bottom Line
SHOP stock is definitely not cheap — it’s trading at over 20 times its sales. However, you’re paying for high growth and a huge amount of potential. Shopify is still just a fraction of the size it could become — I wouldn’t be surprised to see SHOP stock grow to 10 times its current size over the next few years.
Shopify is only serving a fraction of its potential customer base at the moment, and what’s more, e-commerce is still in the early stages of growth. E-commerce only accounts for about 8.4% of the total retail sales in the U.S.
I think that figure will grow exponentially over the next decade and Shopify will expand right alongside it.
It’s important to realize that buying such a young company carries a great deal of risk, and with Shopify earnings coming up on Tuesday, investors who add SHOP stock to their portfolios have to be prepared for some steep ups and downs. Shopify’s modest size means that the company will feel the effects macroeconomic events much more than its larger peers. Not only that, but perceived weaknesses in the firm’s quarterly results will have a match larger impact on SHOP stock.
With that said, investors who are able to ride out some volatility will benefit from Shopify’s impressive growth potential.
As of this writing, Laura Hoy was long AMZN.