Shopify (NYSE:SHOP) stock has been the “poster boy” for growth stocks over the past few years, rallying an absurd 3,260% over the past five years as Wall Street has grown increasingly bullish on Shopify stock to turn into the software technology backbone of e-commerce.
But this secular uptrend in Shopify has been challenged over the past few months, with shares having fallen into a range-bound sideways trading pattern between $900 and $1,100.
Favorable Covid-19 vaccine news from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) has spooked investors into thinking that the 2020 e-commerce surge on the back of physical store closings will come to an end soon, thereby weighing on Shopify’s supercharged growth rates.
But that’s not going to happen.
Covid-19 or not, Shopify will remain in hypergrowth mode in 2021, and for the next several years — which broadly means that SHOP is a great buy right now amid this recent choppiness.
Here’s a deeper look.
Shopify Stock: E-Commerce Megatrend Isn’t Going Anywhere
The market is wrong to think that the disappearance of the Covid-19 pandemic will meaningfully slow the e-commerce megatrend.
The reality is that the shift toward digital retail has been underway for over twenty years now, and will simply continue at an accelerated pace over the next twenty years, as the value prop of e-commerce continues to improve.
Among other things, e-commerce is faster (you don’t have to drive anywhere), cheaper (you don’t have to pay for gas or parking) and more convenient (things are delivered within days, and sometimes hours, without you having to do anything besides click a few buttons).
Importantly, e-commerce is only getting relatively even faster (because population growth leads to busier roads), even cheaper (inflation is a thing) and even more convenient (improvements in logistics continue to shrink delivery times).
Big picture: Forget Covid-19. The shift toward e-commerce is here to stick — meaning weakness in SHOP stock because of Covid-19 vaccine news is irrational and short-sighted.
Shopify Will Remain in Hypergrowth Mode
Need proof of e-commerce’s staying power?
Look at Shopify’s second- and third-quarter earnings reports.
The macro-retail environment in the second and third quarters was very different. During April, May and June, most physical stores were closed down and most consumers were holed up in their homes. Throughout July, August and September, though, physical retail stores opened back up and consumers mobilized again.
But, Shopify’s second- and third-quarter earnings reports are almost identical to one another, with both registering growth rates sharply higher than pre-Covid levels. Take a look:
|1Q20 Growth Rate (pre-Covid)||2Q20 Growth Rate (everything closed)||3Q20 Growth Rate (partially open)|
Shopify’s sustained huge growth in the third quarter — a time in which the world did increasingly normalize — strongly implies that the world isn’t going back to the old normal, but rather rushing into a new normal.
In this new normal, consumers shop online more than ever before, and small retailers — who previously relied heavily on physical sales to drive their businesses — are now looking to e-commerce as their future.
Of course, that’s great news for Shopify, because the company provides e-commerce solutions which help all those small retailers sell online. Thus, as the world increasingly pivots into this new normal wherein e-commerce reigns supreme, demand for Shopify will remain exceptionally robust, and the company will remain in hypergrowth mode, with or without the pandemic.
The investment implication is to buy Shopify amid recent weakness.
Long-Term Upside for Shopify
My bullishness on Shopify stock amid current choppiness is supported by my long-term modeling on the company, which implies that shares are undervalued today.
Given Shopify’s sustained robust growth in the third quarter, I see the company staying in hypergrowth mode for the next 10 years as more and more small businesses lean more heavily into e-commerce to drive sales. Under that headline assumption, my modeling suggests that Shopify’s earnings will march towards $70 by 2030 — which also happens to be the Street’s consensus 2030 earnings per share target.
Based on a 35-times forward earnings multiple and an 8.5% annual discount rate, that equates to 2020 price target of about $1,200.
Thus, below $1,000 today, SHOP stock is undervalued relative to the company’s long-term earnings growth potential.
Bottom Line on SHOP
Don’t overcomplicate this one. Shopify stock is a long-term winner. Near-term weakness is nothing more than a buying opportunity.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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