Shopify (NYSE:SHOP) stock popped to all-time highs after the e-commerce solutions provider reported second quarter-earnings that breezed past expectations and included explosive growth on the back of shopping-from-home tailwinds over the past few months.
Bears are left scratching their heads at the huge move.
They point to the fact that Shopify is now a $120 billion company, projected to do less than $2.5 billion in sales this year, as proof that SHOP stock is wildly overvalued.
Reality check: it’s not.
Shopify has a huge growth opportunity in front of it to become the ubiquitous backbone of the $20+ trillion global commerce market. And the company’s second quarter earnings report, along with essentially every earnings report dating back to the company’s 2015 IPO, shows that management is strongly executing against this huge opportunity.
To be sure, SHOP sock is slightly overvalued relative to the company’s huge profit growth prospects. But not wildly overvalued. Rather, my numbers indicate the stock is overvalued by just about 10%.
That’s not enough to give up on a stock that projects as a huge long-term winner.
So, stick with a long-term strategy on SHOP stock. Trim some on rallies. Buy back on dips. And ultimately stay the course for the long haul.
A Compelling Growth Narrative
The bull thesis on SHOP stock is shockingly simple.
The e-commerce solutions provider is increasingly and rapidly turning into a necessary backbone of global commerce.
That bull thesis breaks down into a few points.
First, retail sales are pivoting into the online channel. This has been going on for several years, thanks to the proliferation of internet access as well as improvements in the online shopping experience. This trend projects to only accelerate over the next several years, as the aforementioned drivers couple with novel coronavirus-inspired shopping-from-home trends.
By the end of the decade, 30%+ of global retail sales will be online. That number will grow to 50%+ by 2050.
Second, selling online is fundamentally different than selling in-stores. It requires an entirely new set of tools, like the ability to make e-commerce enabled websites, logistics, omni-channel engagement and digital marketing.
As merchants and retailers pivot online to chase demand, they will need to equip themselves with all of these tools in order to effectively compete in e-retail.
Third, Shopify has a created a best-in-breed, end-to-end technology platform that gives merchants and retailers of all shapes and sizes centralized and seamless access to those tools. Competition is relatively muted. Network effects are in place.
And the platform is only getting more robust by the month, with Shopify recently expanding sales distribution into Facebook (NASDAQ:FB), Instagram and Walmart (NYSE:WMT). It is also launching new products like Shopify Balance (a suite of financial products for startup retailers) and Shop Pay Installments (which offers the ability for consumers to pay in installments).
In other words, Shopify has constructed a top tier, robust e-retail technology platform which millions of merchants and retailers across the globe will adopt over the next several years.
A Huge Opportunity
Needless to say, Shopify’s long-term opportunity is not small.
But, on the idea that Shopify’s target audience of small to medium-sized merchants isn’t a big driver of global retail sales, bears think the opportunity isn’t huge.
They’re wrong. Shopify’s long-term opportunity is huge.
In the U.S. retail trade sector, roughly 1 million businesses did $4.2 trillion in sales in 2012. Just over 700,000 of those retail businesses were “small,” or did less than $10 million in annual revenue. Those 700,000-plus businesses did roughly $1.4 trillion in sales, or about 35% of total U.S. retail trade sector sales in 2012.
Clearly, small guys aren’t a small driver in the U.S. retail picture.
Extrapolating this reality out, it becomes obvious that Shopify has a huge global opportunity.
Total retail sales in the world are marching towards $40 trillion. Assuming small businesses drive a comparable 35% of that pie, then you’re talking an addressable market for Shopify of $14 trillion. Of course, Shopify is better served to meet the e-commerce side of that market. But the company does have a rapidly expanding point-of-sale (POS) business which will help Shopify, in the long run, become important on the physical retail side of the equation, too.
For perspective, Shopify’s GMV last year was $60 billion.
In other words, Shopify truly is in the top of the first inning of a huge growth narrative.
SHOP Stock is Not a Bubble
Contrary to the prevailing bear thesis, SHOP stock is not a bubble.
Instead, Shopify stock is a long-term winner that is slightly overvalued today, and which is a strong buy on future dips.
The numbers supporting today’s valuation are fairly straightforward. I project that:
- Global retail sales rise to $40 trillion by 2030.
- E-retail sales rise to $14 trillion, or 35% penetration.
- Shopify’s GMV rises to the $1.4+ trillion range, representing 10% share of global e-retail sales (versus ~2% in 2019).
- Revenues rise to $30+ billion by 2030, from $2.2 billion projected this year.
- Gross margins scale to north of 60%.
- Positive operating leverage and gross margin expansion drive operating margins to nearly 30%.
- Earnings per share rise to $55.
Based on a typical application software sector-average 35x forward earnings multiple, that implies a 2029 price target for SHOP stock of $1,925. Discounted back by 8.5% per year, that implies a 2020 price target for Shopify stock of ~$925.
So, yes, SHOP stock is overvalued today.
But not by much.
And certainly not by enough to throw in the towel on this long-term winner.
Bottom Line on SHOP Stock
Shopify stock is a long-term winner. That isn’t grossly overvalued. And which has increasingly clear visibility to significant upside potential over the next decade.
My advice is simple.
Stick to a long-term strategy on SHOP stock.
Buy on dips. Trim rallies. Ultimately, stay the course.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango was long SHOP and FB.