I’ve been a big and outspoken bull on Canadian e-commerce solutions provider Shopify (NYSE:SHOP) for a long time now. It all started a little over two years ago, when I called Shopify stock one of the most exciting stocks on the market.
While I’ve been signing that tune, Shopify stock has been one of the best performing stocks in the entire market. Two years ago, this was a $90 stock. Today, Shopify stock trades hands north of $300. In other words, SHOP stock is up more than 230% over the past two years, while the S&P 500 is up just 20% over that same stretch.
To be sure, Shopify stock has run into some turbulence lately. Around the middle of June, this was a $340 stock. It fell to $280 towards the end of June amid a broader market sell-off. That near 20% plunge in the stock has some worried that the secular bull run in SHOP stock is coming to an end.
It’s not. That was a long overdue, necessary, and healthy rest on SHOP stock after a big rally off the $200 level. Now, the stock has reset, and it’s ready to move higher. This dynamic of big rallies followed by minor sell-offs followed by big rallies will persist for the foreseeable future.
Why? Because SHOP stock is still one of the most exciting stocks in the market, supported by one of the most robust growth narratives, and driven by some of the most powerful growth catalysts.
All in all, then, Shopify stock still is a long term winner. Here’s an in-depth look at why.
Understanding the Coordinated Economy
First, in order to understand why SHOP stock is a long term winner, we must first understand the era in which Shopify is operating. That era is increasingly defined by a global economic shift towards something called the coordinated economy.
I’ve covered the coordinated economy in depth before, but to be succinct: it’s a modern economic system that leverages technology and incentives to unlock the power of the people. Broadly, the widespread proliferation of the internet has ushered in an era of unprecedented connectivity and democratized capability.
Nowadays, consumers globally are empowered and enabled to do a great number of things they weren’t able to do before, and can be rewarded for doing those things. Some examples? Starting an online store, or providing car rides for money, or becoming social media influencers.
Indeed, consumers are doing just that. The result? Our economy is shifting from ecosystems with few suppliers, to ecosystems with multiple suppliers, because many people are empowered to do what only a few could do before.
Supply in these ecosystems is subsequently rising. Demand is relatively stable. Higher supply on stable demand means lower prices and higher convenience for consumers.
At the same time, all these new suppliers are going from making no money to making some money. Thus, not only does the coordinated economy provide enhanced outcomes for buyers, but it also provides enhanced outcomes for the majority of sellers, meaning it provides enhanced outcomes for nearly everyone.
As such, the coordinated economy shift is happening, everywhere, and the shift is only gaining momentum every single day. Over the next decade, this shift will continue to play out, and by 2030 the global economy will be much more decentralized and democratized than it is today.
How the Coordinated Economy Is Changing Commerce
Second, to understand why SHOP stock is a big winner in the coordinated economy, it is equally important to understand how this coordinated economy shift is impacting the commerce world. Long story short, the coordinated economy is birthing an era of direct decentralized commerce which, while small today, will one day represent the bulk of consumer transactions.
There are two things going on here. First, you have the pivot to direct retail. As mentioned earlier, the widespread proliferation of the internet has created an era of unprecedented connectivity, meaning any buyer can directly reach any seller at any time through any channel.
Sellers don’t have a big need for middle men in the transaction process anymore. They can effectively reach buyers on their own. As such, they are doing just that, and direct retail has become the focus of many retailers across the world.
Second, you have the pivot towards decentralized retail. Because everyone is connected all the time, it’s not just Walmart (NYSE:WMT) or Amazon (NASDAQ:AMZN) that can reach consumers through the internet. I can reach consumers through the internet, too. So can you. And anyone else, too.
Consequently, the current era of unprecedented connectivity simultaneously means anyone can sell anything to any one else at any point in time.
Combine those two things, and you have a new commerce model that is the byproduct of the coordinated economy shift: direct decentralized retail. Right now, this model accounts for a relatively small fraction of global retail sales., bBt, at scale, it will account for the bulk of global retail sales.
The reason’s simple. Because direct decentralized retail (much like the coordinated economy) produces enhanced outcomes for both buyers and sellers. Buyers get more options and more supply, which means lower prices and higher convenience. Meanwhile, the bulk of sellers go from no profits to some profits.
Net-net, the coordinated economy shift applied to commerce means that the retail world is pivoting towards a direct decentralized retail model that, while small today, will one day account for the lion’s share of global retail sales.
Where Shopify Fits into the New Commerce Model
After that long introduction into the market backdrop, we can dive into where Shopify fits into the the coordinated economy and direct decentralized retail model.
As more and more buyers and sellers migrate to the online channel, the ecommerce landscapes grows increasingly complex and diversified. This complexity and diversity presents challenges to sellers, especially new sellers.
Those challenges aren’t easily overcome, and as such, sellers desperately need tools to help them succeed in the increasingly complex and diverse commerce landscape.
Insert Shopify. Shopify provides the tools which sellers of all shapes and sizes need to be successful in a direct decentralized retail world, including tools which enable sellers to sell across multiple digital channels, customize online stores, manage product inventory, fulfill orders easily, track sales, and much more – all in one place.
The demand for these solutions will only grow as the volume of sellers grows over time with the widespread proliferation of the direct decentralized retail model.
In other words, Shopify isn’t just a player in the direct decentralized world, they are the backbone of this market, providing the tools which make this new model of commerce work at scale and for everyone.
In this sense, so long as the direct decentralized retail pivot persists and Shopify remains the solutions leader, SHOP stock should head higher in the long run.
The Shopify Model Is Working
The theory outlined above broadly states that Shopify’s model of providing ecommerce solutions to new sellers in the direct decentralized retail world should be a winning strategy. The reality supports this theory.
Across the board, Shopify’s numbers scream huge growth. In early 2015, Shopify had about 160,000 merchants on its platform. Today, Shopify has about 800,000 merchants.
More than simply growing its merchant base, Shopify is also growing its successful merchant base. Last year, the number of merchants on Shopify that achieved over $1 million in gross sales grew by nearly 60% year-over-year, while merchants selling on Shopify for 12 or more months grew their gross sales by 24% year-over-year, on average.
Thus, the success of Shopify’s underlying merchant base speaks to the strength of the secular direct decentralized retail pivot, and supports further growth in that merchant base.
That means more and more sellers will adopt the Shopify platform, which means more and more buyers. The number of buyers on Shopify stores has grown from 28 million in 2014, to 218 million last year.
More sellers plus more buyers equals more sales. Gross merchandise value (GMV) through Shopify stores measured $3.8 billion in 2014. Last year, it was north of $40 billion, up more than 50% year-over-year. Growth isn’t slowing, either. GMV growth in the first quarter of 2019 was again in the 50% and up territory.
Huge GMV growth has powered huge revenue growth. Revenue growth has been 50%-plus for the past several quarters and years. All that revenue growth has been of the high-margin variety, too, and net net, Shopify has experienced huge gains in both revenues and profits over the past several years. During this stretch of huge revenue and profit gains, SHOP stock has soared higher.
The Shopify Model Will Continue Working
The Shopify model has worked wonders for SHOP stock over the past several years. It will continue to do so over the next several years, too.
Sellers will continue to migrate to the Shopify platform as the global retail model becomes increasingly decentralized, and as Shopify’s merchants continue to experience huge growth and success.
Buyers will continue to follow those sellers since demand always follows supply. Thus, seller and buyer growth over the next several years will remain robust.
Robust seller and buyer growth will produce doubly robust GMV growth, which will flow into equally robust revenue growth. Gross margins are big, and with scale, the opex rate should fall due to positive operating leverage.
The result? Huge revenue and profit growth are here to stay for the long run for Shopify. All that growth should support SHOP stock moving higher long term. How much higher? Given Shopify’s long term opportunity and relatively small addressable market penetration, Shopify stock will probably head way higher before it’s all said and done.
Shopify’s Long Term Opportunity Is Huge
In the big picture, Shopify’s long term opportunity is huge, and Shopify is just scratching the surface of its long term potential.
Shopify’s addressable market is equivalent to the global e-commerce market. Last year, that market measured around $2.8 trillion in sales. That represented just 11.9% of total retail sales, but the 11.9% e-retail penetration rate is up from 8.6% in 2016 and 10.2% in 2017.
Current secular trends support the e-retail penetration rate continuing to move higher over the next several years.
Indeed, by 2021, that share is projected to hit 17.5%. The total e-retail market is expected to measure $4.9 trillion. At that pace of growth, e-retail penetration rates could easily measure around 25% by 2030, meaning that a quarter of all retail sales will happen in the direct channel by 2030.
At that rate, the e-retail market could easily measure well north of $10 trillion.
Let’s put that huge addressable market in context to Shopify. Shopify’s gross merchandise value was around $41 billion last year. Thus, in 2018, Shopify controlled just ~1.5% of the global e-commerce market. That’s tiny. But, it’s also up from 0.8% in 2016, and 1.1% in 2017. If current growth rates persists, Shopify’s 2019 market share could creep up on 2%.
In other words, what you have with Shopify is a hyper-growth player with small but rapidly scaling share in a super big market. Ultimately, that combination implies that the runway for growth here is very, very long, and very, very promising.
Watch out for the Pivot into Physical Retail
Something of note: Shopify isn’t a stagnant company. Instead, it’s an innovative company that continues to expand its product offerings. The most recent expansion? A pivot into physical retail which dramatically expands the company’s addressable market, and lengthen’s the already long growth runway.
Up until now, Shopify has been an ecommerce focused company, meaning that physical retail sales were largely out of the scope of Shopify’s business, but physical retail sales accounted for near 90% of all retail sales last year.
Despite secular trends supporting ecommerce adoption, hardly anyone is projecting for that figure to drop below 50% anytime before 2040, if ever.
Thus, by not having a formidable physical retail presence, Shopify was missing out on more than half of the party.
Now, Shopify is investing into building out that formidable physical retail presence, and is developing tools to help sellers of all shapes and sizes succeed in the physical retail channel, too. That expands Shopify’s addressable market by a factor of 10, from $2.8 trillion in 2018, to $23.9 trillion.
It will also help alleviate some slowing growth at Shopify. Shopify’s ecommerce GMV growth rates have consistently slowed over the past several quarters.
They will likely continue to slow over the next several years as the lap gets tougher, but a pivot in the physical channel will bring in new GMV, which should help offset slowing ecommerce growth and stabilize overall GMV growth.
Shopify’s Long Term Potential Is Enormous
Given the company’s huge addressable market and secular growth tailwinds, Shopify’s long term profit growth potential is enormous.
Global retail sales will likely measure around $43 trillion by 2030, given inflation and population growth. Of that, probably a quarter are e-retail sales (almost $11 trillion) and the rest are physical retail sales (about $32 trillion).
Shopify currently controls about 1.5% of the e-retail market, and essentially 0% of the physical retail market. At scale, by 2030, it is fairly believable that Shopify can command 7.5% market share in e-retail, and 0.5% market share in physical retail.
That would produce GMV of nearly $1 trillion, with about $850 billion coming from e-retail and the remaining $150 billion from physical retail. Shopify’s take rate of GMV normally hovers around 1.5%, so that equates to merchant revenue of about $15 billion.
Assuming the subscription business grows somewhat in line with the merchant business, sub revenues could easily get to $4-$5 billion by 2030. Thus, Shopify’s revenues could easily get to nearly $20 billion by 2030.
Gross margins have hovered in the mid-50% range recently, and will probably stabilize in that mid-50% range at scale. The opex rate hovers around 55%, and that will easily fall a ton as scale kicks in.
It will probably settle around 30%, implying 25% operating margins. On a $20 billion revenue base, that implies $5 billion operating profit potential at scale.
Taking out 20% for taxes and assuming somewhere between 150 and 160 million shares outstanding, that equates to a 2030 EPS target of about $25, versus projected EPS this year of $0.60.
Shopify Stock Has Long Term Upside to $750
Over the next decade, it is fairly likely that Shopify stock will run towards $750.
The math here is pretty easy to follow. A reasonably optimistic estimate for 2030 EPS is $25. Shopify is an application software company with high margins, big growth, limited competition, and a clean balance sheet.
Consequently, the stock will warrant a high quality growth multiple of around 30-times forward earnings. A 30 forward multiple on $25 in 2030 EPS implies a 2020 price target of $750.
Thus, in the long run, SHOP stock has healthy upside potential.
Caution is warranted in the near term. If you take that optimistic decade forward price target of $750 and discount it back by 10% per year, you arrive at a 2019 price target for SHOP stock of just under $300. Thus, at current values, SHOP stock seems fairly valued, not undervalued.
Bottom Line on Shopify Stock
Shopify stock has been one of the market’s brightest stars over the past several years. It will continue to be a bight star over the next several years, too.
The secular growth narrative here remains robust enough, and the growth driers powerful enough, that Shopify will continue to grow revenues and profits at a tremendous pace over the next several years. That tremendous pace of profit growth will keep SHOP stock on a long term uptrend.
As of this writing, Luke Lango was long SHOP.