Shopify (NYSE: SHOP) shareholders have experienced an eventful five years. The stock surged into the stratosphere during the pandemic's height, only to lose up to 87% of its value when people resumed their offline shopping habits in 2022.
Although it has experienced a considerable resurgence since then, it still sells for less than 50% of its 2021 high. The question for investors is whether it can beat the market over the next five years, or whether business conditions are likely to derail its recovery.
Where Shopify stands as a company
Shopify began as a merchant solution. It stood out in the highly competitive e-commerce platform environment by offering highly customizable, no-code websites. Because slow website speeds can lose sales, Shopify also emphasized rapid transactions.
Nonetheless, Shopify has expanded its competitive advantage by offering ancillary services that can make it a one-stop shop for all e-commerce needs. Hence, services as diverse as payment handling, social media management, and raising capital can be handled through Shopify.
Shopify also tried to build on this by adding a fulfillment and shipping business. However, the high costs (and likely low margins) of offering such services prompted Shopify to sell its logistics arm. Selling that business has allowed Shopify to return to profitability, which could bode well for the company over the next five years.
Grand View Research forecasts a compound annual growth rate (CAGR) for the e-commerce industry of 19% through 2030. This should mean good things for Shopify, even if it cannot attract customers through offering logistics.
Shopify's finances and stock
As for the financials, one way to gauge where Shopify is going is to look at the revenue levels of the last few years. Investors will probably see a marked deceleration in revenue growth.
Revenue growth levels had slowed by 2019, when they fell below 50%. Nonetheless, the pandemic created unexpected demand for online shopping, leading to massive revenue increases in 2020 and 2021. Since then, revenue growth has slowed dramatically.
| Year | Revenue Growth Rate |
|---|---|
| 2019 | 47% |
| 2020 | 86% |
| 2021 | 57% |
| 2022 | 21% |
| 2023 | 26% |
Data source: Shopify annual reports from 2023, 2021, and 2019.
Price increases in 2023 might have obscured that effect. Still, customers can mitigate that effect by switching to cheaper yearly plans.
Investors should also remember that Shopify earned $3.9 billion in revenue in the first half of the year. Almost 73% of that came from its merchant solutions rather than the sites themselves, meaning the price increases may have had little effect on growth.
Moreover, thanks to the sale of the logistics business, Shopify looks to have returned to profitability. Although the company lost $111 million in the first half of 2024, that included a $170 million net income in Q2. This increases the likelihood that it will be profitable for 2024, a hoped-for improvement that likely helped spark the recovery in Shopify stock.
Additionally, it sells at a forward price-to-earnings (P/E) ratio of 75 and a price-to-sales (P/S) ratio of 14. While those may sound high, the P/S ratio is far below levels during the pandemic's height, which should reduce concerns related to its valuation.
The P/S ratio also reflects hopes for the future, and analysts' five-year earnings growth prediction calls for 47% annual profit growth on average. Although such forecasts are "way too early" predictions that will likely change when more data becomes available, they indicate that profits can grow dramatically in the coming years.
Shopify in five years
Ultimately, Shopify is more likely than not to grow faster than the market over the next five years.
Admittedly, the slowing revenue growth is a concern, and the 47% annual profit growth predictions could prove too optimistic.
However, even if revenue growth settles in the 20% annual range, it should be sufficient to spark significant earnings growth now that Shopify is again profitable. Considering the predicted 19% CAGR for e-commerce through 2030, Shopify is well-positioned to benefit from the industry's continued tailwinds.
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Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.
