The simplest way to miss out on big gains in this market is to argue that a stock like Shopify (NYSE:SHOP) is “too expensive.” Skeptics have been making that claim since Shopify stock still traded below $100. In this nervous market, and with SHOP trading near $500, they no doubt still are.
To be sure, Shopify stock isn’t cheap. It shouldn’t be. The company is only at the beginning of a megatrend that literally is changing consumer and small business behavior worldwide.
Yet skeptics persist. The worst error some of those skeptics make is to argue that the multiples assigned SHOP stock, Tesla (NASDAQ:TSLA), or even Amazon (NASDAQ:AMZN) prove that the market “isn’t paying attention” to valuation.
In fact, it’s the exact opposite. Investors in those growth names are paying attention. They’re paying attention to what really matters: the company’s future opportunity, not its past or current results. Focusing solely on the numbers too often can be a case of missing the forest for the trees.
And Shopify has a massive opportunity ahead. It’s why I’ve recommended Shopify stock for years. It’s why I still do, even in this nervous market.
On Feb. 12 Shopify reported fourth quarter earnings. Unsurprisingly, SHOP stock soared after the release.
In the key holiday quarter, Shopify grew sales 47% year-over-year. Adjusted earnings per share of 43 cents crushed Wall Street estimates. It’s impossible to look at the report and see anything but a business firing on all cylinders.
Again, investors need to look forward and keep broad trends in mind. In that context, it’s worth focusing on a seemingly small detail from a presentation Shopify compiled along with the Q4 release.
In that presentation, Shopify noted that its e-commerce market share in the U.S. for 2019 was 5.9%. From one perspective, that figure is stunning.
This is a company that was founded just sixteen years ago. It went public less than five years ago. Yet on the back of serving mostly small business, it now accounts for nearly 6% of total e-commerce revenue in the U.S.
Shopify’s market share is greater than that of Walmart (NYSE:WMT)! It’s more than four times that of Best Buy (NYSE:BBY), and last year the company passed eBay (NASDAQ:EBAY) for second place, behind only Amazon.
An Enormous Opportunity
But look at that 6% from another angle — that of an investor looking forward. If Shopify has just 6% penetration of the U.S. market, it has years, and likely decades, worth of growth ahead.
After all, Amazon has 37% of the market. And make no mistake, Shopify is a real threat to that giant. Millennials in particular, have a taste for smaller, quirky, less corporate brands. Those are precisely the kind of small to medium-sized businesses that gravitate to the Shopify platform.
What happens to Shopify revenue as its share gets to 15% and 20% of that market? After all, e-commerce sales as a whole are only going to grow. Traditional brick-and-mortar revenue trying desperately to capture a piece of that market — and losing money in the process — will fade away.
More importantly, what happens to Shopify’s profits as that market share grows? Bear in mind that incremental margins for any platform stock like SHOP are huge. Once the infrastructure is in place, each additional customer has minimal cost.
Right now, Shopify’s profits are close to zero. In fact, the company is guiding for an adjusted operating loss of $0 to $20 million in 2020 as it invests in the business. When this business matures, however, this will be a cash flow machine in the U.S. market.
And that 6% market share doesn’t even cover the international opportunity, which can be just as huge. Shopify is in the early innings overseas. International revenue was less than one-third of the 2019 total.
This company is going to grow for decades. That’s why savvy investors have ignored valuation concerns and made enormous returns in Shopify stock.
Recession Risk, Valuation and Shopify Stock
SHOP stock has pulled back in recent sessions along with the broad market. Some nervous investors might be looking for what they see as lower-risk stocks as recession worries appear to mount.
But as I discussed on my Moneyline podcast last year, the idea of “recession-proof” stocks is close to ludicrous. Take a supposedly defensive name like Procter & Gamble (NYSE:PG). Its shares dropped by more than one-third when markets crashed in 2009. The Utilities Select SPDR ETF (NYSEARCA:XLU), composed of utility stocks supposedly fit for “widows and orphans,” fell by nearly half.
Even assuming an investor could properly time the market (and they can’t), there’s no “rotation” into defensive stocks that is going to provide complete protection from short-term market declines.
Of course, risk tolerance matters. Position sizing for a stock like SHOP in a market like this is important. And as markets continue to fall on Tuesday, there’s no need to rush in.
But, again, take the long-term view. Would you rather ride out a choppy market with a stock that has a massive, long-term opportunity, or a “cheaper” name whose meager growth potential could be completely eliminated in a downturn?
Yes, Shopify stock looks expensive. Again, it should. And here, too, investors should consider the alternatives. Shopify has a market capitalization roughly double that of eBay, which actually makes some sense.
An investor could, and should, rather pay a premium for a company whose market share is going from 6% to 20% over one who is hoping just to keep that 6%. Based on 2019 results, EBAY is cheaper. I’ll bet that looking to 2029 and beyond, it won’t be.
That’s the perspective investors need to have now more than ever. In the short-term, stocks rise and stocks fall. Over the long haul, winners win. Shopify stock is a winner.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.