For most of 2019, shares of Canadian e-commerce solutions provider Shopify (NYSE:SHOP) looked unstoppable. SHOP stock went from $140 in January 2019, to over $400 by late August 2019, in straight line fashion without much volatility. Indeed, during that near-200%, eight-month rally, SHOP stock only had one correction more than 10%.
In other words, Shopify stock essentially tripled through the first eight months of 2019, and did so with only one hiccup. That’s impressive.
But, stocks don’t go up in straight lines forever, and over the past month, the bear has come knocking on Shopify’s door. From those late August highs, SHOP stock has plummeted more than 20% amid macro concerns with respect to momentum stock valuations and slowing growth throughout the economy.
This recent plunge in Shopify stock is nothing more than a long-term buying opportunity. Sure, shares might be choppy for the foreseeable future. But, after a near tripling in value from January to August, this choppiness is just natural consolidation, and nothing to worry about.
Soon enough, the weak hands will shake out, and SHOP stock will resume its secular march higher.
Fundamentals Remain Rock Solid
There are two big drivers of the fundamentals underlying SHOP stock and both remain as robust ever.
First, there’s the huge physical to digital retail shift. Consumers are pivoting from physical to digital retail channels. In so doing, they are forcing merchants to shift from a physical retail strategy, centered around a physical storefront (a store in a mall), to a digital retail strategy, centered around a digital storefront (a website). Shopify is the best in the world at helping merchants build these digital storefronts. In the long run as digital consumption becomes a bigger piece of the pie, every merchant will have to have a digital storefront. Most of those merchants will be using Shopify to power their digital storefronts.
In short, the physical-to-digital retail shift provides a huge merchant growth tailwind for Shopify.
Second, there’s the decentralization movement in the retail world. Consumers are increasingly discovering products through social channels, like Instagram, Facebook, Snapchat, etc. That discovery process leads consumers to a brand’s social page, which most normally links back to its own website (not a marketplace landing page), since the brand pays lower fees through its own website, among other reasons. Because of this, in the long run as digital retail consumption becomes more direct, more sales will flow through merchant websites, the sum of which will be powered by Shopify.
So, the decentralization movement happening throughout the retail world provides a huge volume growth tailwind for Shopify.
Net net, Shopify is powered by two huge tailwinds rippling through the retail world, both of which pave a path for big revenue growth in the long run.
SHOP Stock is Undervalued Relative to Long-Term Potential
The bull thesis on SHOP stock lays out like this: Following the recent 20% plunge in shares, the shares are undervalued relative to its long-term growth potential.
Here are the numbers. Total e-retail sales measured $2.9 trillion in 2018, accounting for about 12.2% of total retail sales in the world. By 2023, that number is projected to grow to $6.5 trillion, or about 22% of retail sales, according to eMarketer. At that rate, by 2030, total e-retail sales should measure around $12 trillion, or 30% of retail sales.
Shopify’s GMV measured about $41.1 billion in 2018. That represents just 1.4% of global e-retail sales. But, that’s up 30 basis points from 2017’s share (1.1%), which was up 30 bps from 2016’s share (0.8%). Meaning, with Shopify, you have a share gainer in a secular growth market.
This cadence of roughly 30 bps of share expansion per year should persist, given the aforementioned direct and decentralized growth tailwinds. Thus, by 2030, it is very reasonable to assume that Shopify captures about 5% of the global e-retail market. Assuming subscription revenues grow at a similar pace as GMV, then Shopify could be looking at $13 billion in sales by 2030 — a 23% annualized growth rate from 2018.
Gross margins will continue to hug the 60% line. The opex rate should fall with scale towards a more normal 30% level. Net net, Shopify projects as a $13 billion revenue company by 2030, with 30% operating margins. That combination makes $25 in EPS seem doable by 2030.
Based on an application-software-average 35-times forward multiple and a 10% discount rate, that equates to a 2019 price target for SHOP stock of about $340.
Bottom Line on Shopify Stock
Shopify stock is a long-term winner that has hit a very natural rough patch over the past month. This is nothing to worry about. The stock is simply consolidating after a red-hot rally.
Because the fundamentals remain strong, all that’s happening right now is that the stock is taking a breather, and allowing the valuation to catch up to the fundamentals.
This has arguably already happened. Thus, within the next few months, SHOP stock should resume its secular march higher.
As of this writing, Luke Lango was long SHOP.
