Fulfillment Investments Now Will Pay off Big for Shopify Stock

Coming off a year in which it more than tripled and with it trading at frothy valuations, Shopify (NYSE:SHOP) stock has some work to do this year. That doesn’t mean Shopify stock is a name to avoid. Quite the contrary.

Fulfillment Investments Now Will Pay off Big for Shopify Stock

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Amid ongoing growth in the scorching hot software-as-a-service (SaaS) and eCommerce arenas, the company’s core competencies, Shopify could be in for another solid year, though it may not triple as it did in 2019.

Shopify is a momentum name, and right now the momentum is in the stock’s favor. SHOP rallied in December and now resides well above Wall Street’s consensus price target of around $365, indicating analysts may need to step in and boost that forecast.

Currently, Rosenblatt Securities has a $481 target on Shopify and although the stock closed just over $404 last Friday, calling for $480 to $500 at some point this year isn’t audacious. It’s quite reasonable.

One source of fuel for Shopify stock in 2020 is growth among third-party sellers, one of the company’s marquee constituencies. As I’ve previously noted, Shopify is more seller-friendly than rival Amazon (NASDAQ:AMZN) and that’s meaningful as the internet shopping marketplace evolves.

“Third-party sellers posted record-breaking results, as worldwide unit sales grew at a double-digit pace from the prior year and surpassed a billion items sold,” said Argus analyst Jim Kelleher in a recent note.

Fun in Fulfillment

As is the case with Amazon and other big eCommerce players, fulfillment execution is integral to Shopify’s day-to-day operations and its stock price. The “last mile,” getting purchases to buyers’ homes, is where online retailers can feel some pinch on their bottom lines. Shippers such as FedEx (NYSE:FDX), UPS (NYSE:UPS) and the United States Postal Service (USPS) are part of the fray and they’re not necessarily keen on kowtowing to Amazon.

FedEx recently parted with ways with the eCommerce giant as a customer and even President Trump has taken to Twitter to decry the costly relationship the USPS has with Amazon.

So it’s not surprising that Amazon has its own burgeoning fulfillment operation, one that has already made the company one of the largest package shippers in the U.S. Shopify is taking a page from its rival’s playbook and its fulfillment effort could benefit investors later this year.

“We expect Shopify Fulfillment Network will be up and running by 4Q20E and given pent-up merchant demand we hear from industry, we don’t expect an extended long-tail revenue ramp,” according to Rosenblatt Securities. “We assume a modest 30 bps ’21E SFN take rate on US-Canada gross merchandise value, implying Shopify Fulfillment Network ’21E revenue of ~$270M, or 12% of US-Canada revenue and 9% of total Shopify revenue.”

Shopify is taking fulfillment seriously as highlighted by an announcement last June that it’s going to spend $1 billion on the effort. That was followed by the September revealing of a $450 million cash and stock deal for 6 River System, a provider of fulfillment technology solutions.

Bottom Line on Shopify Stock

The fulfillment gambit could take a while to pay dividends and bearish investors are pointing to the price tag, noting it could create near-term strain on the company’s bottom line. However, academic research, including some performed by the University of Pennsylvania, suggests fulfillment investments by eCommerce providers are winning ideas over the long-term:

“We find that there are many circumstances in which it is prudent to own fulfillment capabilities and inventory. Empirical data are consistent with hypotheses that this tendency is higher for older firms selling small, high-margin products, offering lower levels of product variety and facing lower demand uncertainty. We also discover that firms making inventory ownership decisions that are consistent with theory and aligned with environmental and strategic factors are less likely to go bankrupt than those making misaligned inventory choices.”

Shopify management is looking to the future and thinking strategically. Stocks are forward-looking, too, meaning Shopify stock could reward investors this year for initiatives that may not benefit the company until 2021.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/fulfillment-investments-pay-off-shopify-stock/.

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