Another quarter. Another beat. Another strong guide.
Such is the norm for secular growth company Shopify Inc (US) (NYSE:SHOP). And yet, despite the strong results, Shopify stock dropped in response.
No need to panic. There wasn’t anything structurally wrong with Shopify’s quarter. In fact, the long-term bull thesis remains in tact.
All you had was a little dose of “buy the rumor, sell the news.” SHOP stock rallied big into the report on expectations that the numbers would blow estimates out of the water. They did, and now those buyers are doing some profit-taking.
This is all just near-term noise in what could otherwise be labeled as one of the most promising long-term growth stocks in the market. Shopify continues to thrive in the overlap of the sharing economy and digital commerce. As the sharing economy and digital commerce continue to erupt in popularity over the next several years and individuals en masse become digital commerce entrepreneurs, SHOP will go from red-hot e-commerce start-up to the backbone of modern, decentralized digital commerce.
As such, Shopify stock has a really positive long-term outlook.
The near-term, though, isn’t as great. The valuation is a stretch at current levels, and it will create some near-term volatility. But long-term investors should ignore that volatility, and stick with this stock for the next five to 10 years.
Here’s a deeper look:
Shopify Stock Is a Long-Term Winner
The sharing economy is the future. Look no further than mega-successful companies like Uber, Lyft, Aribnb, GrubHub Inc (NYSE:GRUB), YouTube, Instagram, and others. Each of these companies has made an absolute killing by taking power from the few and giving it to the many.
Uber and Lyft said you don’t need taxis to get around. All you need is a car, and everyone has a car, so everyone can be a “taxi.” That idea has worked out brilliantly.
Airbnb did the same thing with hotels. GrubHub did the same thing with delivery. YouTube did the same thing with video personalities. And Instagram did the same thing with aesthetic models (think the whole class of Instagram models that became popular simply as a result of Instagram.)
Shopify fits this trend. Shopify is saying that you don’t need to be a big and powerful retailer in order to sell stuff online. You can be anyone, and using Shopify’s tools, your products can reach a global audience and your online “store” can be immensely successful.
It’s the same idea as Uber, Lyft, Aribnb, YouTube and Instagram.
Just as Uber is the future of transportation, Shopify is the future of digital commerce. In the future, we won’t buy everything and anything from Amazon.com, Inc. (NASDAQ:AMZN). Yes, we will buy a ton of stuff from Amazon. But we will also buy a ton of stuff from different mom-and-pop shops that now have the tools to succeed in digital commerce — thanks to Shopify.
Because of this, any knocks against SHOP as a get-rich quick scheme are way off. This is a secular growth narrative that, due to its ability to enable anyone to sell goods online, will grow by a ton over the next several years.
Shopify Stock Has a Big Valuation
Admittedly, you have to look out a long ways out in order to get there on the valuation on Shopify stock. There really isn’t any five-year model that is going to yield a fair value roughly equivalent to the current market value.
And that makes sense. SHOP isn’t a five-year growth story. It is a 50%-plus revenue growth story with less than $1 billion in annual revenues. The company is attacking a huge, several trillion dollars a year e-commerce market that is still rapidly growing. Plus, secular tailwinds in decentralization mean that Shopify’s share of that growing e-commerce pie will likely grow by a ton, too.
Oh, and there’s massive margin drivers in the form of consistently healthy operating leverage.
Thus, to think that Shopify as a company will be at a stable growth state in five years is a little silly. The company is turning into the backbone of a new era of decentralized digital commerce. As such, this is a 10-year-plus growth story.
Shopify Stock in 10 Years
Where will Shopify be in 10 years? Well, total digital commerce revenues globally were $2.3 trillion last year. Shopify grabbed about a percent of that market with a gross merchandise value of $26.3 billion.
By 2021, total global e-commerce sales are expected to be $4.8 trillion. Thus, by 2027, it isn’t unlikely that total global e-commerce sales are north of $6 billion. It also isn’t unlikely, given current decentralization trends, that Shopify’s share of that pie grows to 5% by then.
In that scenario, Shopify is looking at gross merchandise value (GMV) of $300 billion in 10 years. Shopify’s take rate (merchant revenues divided by GMV) usually runs around 1.4%, so merchant revenues should be about $4.2 billion if GMV is at $300 billion. Meanwhile, subscription revenues run around 90% of merchant revenues, so $4.2 billion in merchant revenues should be accompanied by nearly $3.8 billion in subscription revenues.
Bottom Line on Shopify Stock
Total revenues, then, could be $8 billion in 10 years. Management has said about 30% operating margins being the five- to 10-year target, so 30% operating margins on $8 billion in revenues would imply operating profits of $2.4 billion in 10 years. Taking out 15% for taxes and dividing by presumably 150 million shares out, that equates to nearly $13.60 in earnings per share in 10 years.
A market-average growth multiple of 20-times forward earnings on $13.60 implies a nine-year forward price target of $272. Discounted back by 10% per year, that equates to a year-end price target roughly $127.
Valuation remains a challenge currently, but this is a long-term winner that could easily double over the next five to 10 years.
As of this writing, Luke Lango was long SHOP and AMZN.
