Where Will Shopify Stock Be In 10 Years?

Seeking Alpha2021-10-27

Summary Today, Shopify has the second largest market share in the US e-commerce market, with the US representing two-thirds of revenue and subscription solutions accounting for 45% of gross profit. ...

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XWB
2021-10-27
XWB
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(SHOP) is a Hold or Neutral.\nShopify is a leading e-commerce platform operator in the US today, but its share price performance has been poor in the last three months given expectations of weaker growth momentum in the near term. Looking forward to the next decade, I see SHOP's future growth being driven by a positive change in the company's business and market mix.\nI assign a Hold rating to Shopify. I appreciate Shopify's growth prospects in the long term, and I see SHOP boasting higher revenue contribution from non-US markets and an increased proportion of earnings generated from merchant solutions in 10 years' time. By then, Shopify would have been able to realize the growth potential of international markets and its merchant solutions to a large extent. On the flip side, considering that a slowdown in SHOP's top line and bottom line in the short term is inevitable, the valuation de-rating for Shopify's shares could continue for some time. As such, a Neutral investment rating is more appropriate for Shopify.\nShopify Stock Today\nListed on the New York Stock Exchange since May 2015, Shopify Inc calls itself \"a leading provider of essential internet infrastructure for commerce\" that provides \"tools to start, grow, market, and manage a retail business\" in the company's media releases.\nA Snapshot Of What The Shopify Platform Offers To Businesses\nSource: Shopify's July 2021 Investor Presentation Slides\nAs per the chart below, Shopify boasted an 8.6% share of the US e-commerce market in 2020, which only trails Amazon.com, Inc. (AMZN). The key difference between SHOP and AMZN is that the former is an independent platform and does not engage in direct or first-party sales unlike the latter.\nSecond Largest Share Of US E-Commerce Market\nSource: Shopify's July 2021 Investor Presentation Slides\nShopify derived 31% and 69% of the company's 1H 2021 revenue from subscription solutions and merchant solutions, respectively. Subscription solutions and merchant solutions made up 45% and 55% of SHOP's gross profit over the same period.\nA Description Of Shopify's Two Key Revenue Streams\nSource: SHOP's FY 2020 40-F Filing\nSHOP's Subscription Plans And Pricing Tiers\nSource: Shopify's July 2021 Investor Presentation Slides\nNorth America (including Canada), EMEA (Europe, the Middle East and Africa), Asia Pacific and Latin America accounted for 73%, 16%, 10%, and 1% of SHOP's top line, respectively in fiscal 2020. SHOP claims to have a presence in over \"175 countries\", but the US still contributed the majority or 67% of Shopify's revenue last year. Shopify does not disclose the company's geographic sales mix on an interim basis.\nIn the past three months, Shopify's stock price performance has been lackluster, with its shares down by approximately -13%. During the same period, the three major stock indices, the Nasdaq Composite, the Dow Jones, and the S&P 500 rose by +2%, +2%, and +3%, respectively.\nThe market is clearly concerned about a slower pace of growth for SHOP as the economy reopens, and this is reflected in the sell-side's market consensus numbers. Wall Street analysts expect Shopify's YoY top line expansion to moderate from +57% in Q2 2021 to +49% and +40% for Q3 2021 and Q4 2021, respectively. Similarly, SHOP's non-GAAP adjusted earnings per share growth is forecasted to slow from +113% YoY in Q2 2021 to +6% YoY in Q3 2021, and the company is expected to witness a -18% YoY drop in its bottom line for Q4 2021.\nThere are three key reasons why Shopify will experience slower growth in the near term. Firstly, SHOP faces a high base for comparison in 2020, which is an exceptional year as a result of the pandemic. Secondly, US retail sales were boosted by government stimulus in March 2021, but the positive effects of the stimulus have already started to wane in May. Thirdly, physical sales channels might regain some market share back from the online sales channels, as an increasing number of people return to office and do a greater proportion of their spending in physical stores as opposed to e-commerce sites.\nPutting short-term headwinds aside, I examine the long-term growth potential of Shopify in the next section.\nWhere Will Shopify Stock Be In 10 Years?\nShopify has a long growth runway ahead, based on a comparison of the company's current revenue and its total addressable market. The company's trailing twelve months' revenue was $3,853 million as per S&P Capital IQ data. In comparison, SHOP estimates that its total addressable market can be as large as $153 billion, which is based on assumptions of an \"average revenue per merchant of approximately $2,258\" and \"68 million retail businesses globally.\"\nIn other words, Shopify can realize its full growth potential in the next decade, by accelerating the company's international expansion plans, and monetizing its merchant solutions to a greater degree (i.e., increase average revenue per merchant).\nWith respect to international expansion, Shopify still has lots of room to grow. SHOP earned 67% of its revenue from the US and 73% of its top line from North America (including Canada) as highlighted above.\nNotably, the UK represented 44% of Shopify's EMEA sales in FY 2020, while Australia accounted for 42% of SHOP's Asia-Pacific revenue in the recent fiscal year. This reflects an initial focus on English-speaking markets as part of Shopify's international expansion plans, which is understandable. It was only in 2018 that Shopify first introduced foreign language settings and payment methods that are specific to certain foreign markets.\nAs per its corporate website, Shopify currently provides around 20 foreign languages, and noted that it \"plans to release more languages in the coming months and years.\" Furthermore, SHOP's payment service, Shopify Payments, which supports multi-currency payments, are now available in16 foreign markets outside the US (or 17 in total).\nMoving forward, as Shopify continues to localize its platform and services, the company's share of revenue from international markets should continue to grow over time. Given that the US only accounts for an estimated 40% of global e-commerce sales excluding China as pereMarketer data, it is reasonable to assume that Shopify will have more than half of its revenue coming from non-US markets in 10 years' time.\nSeparately, it is worth referring to Shopify's current revenue and earnings mix, in assessing the long-term potential of merchant monetization. As mentioned earlier in the article, SHOP's merchant solutions contributed 69% of the company's revenue in the first half of the year, but only made up a much lower 55% of its gross profit over the same period. This implies that Shopify still has a long way to go, as it has yet to fully monetize the merchant solutions that it offers.\nAn Overview Of Some Of Shopify's Key Merchant Solutions\nSource: SHOP's FY 2020 40-F Filing\nFor example, Shopify Payments was initially launched in 2013, but it still only had a 48% share or less than half of SHOP's GMV (Gross Merchandise Volume) in Q2 2021. Notably, Shopify has only recently supported the use of Shopify Payments on other key social media platforms; Shopify Payments were only available as payment options on Instagram and Facebook (FB) starting earlier this year. Another example is Shop Pay Installments which was recently introduced to the market last year, that has yet to be rolled out to foreign markets outside the US. Shopify disclosed at the company's Q2 2021 results briefing that Shop Pay Installments was only made \"available to all eligible merchants in the US\" in June 2021.\nAs existing merchant solutions grow in scale and realize better profitability as they mature (i.e., positive effects of operating leverage), Shopify should see a significant change in the earnings mix between subscriptions solutions and merchant solutions. Moving ahead, average revenue per merchant for Shopify will increase in tandem with the growth in the penetration rate of merchant solutions. I expect merchant solutions to account for as much as two-thirds of SHOP's gross profit by the next decade.\nIn conclusion, Shopify should witness a meaningful change in the company's geographic and business mix in the next 10 years, which I view as positive.\nIs SHOP Stock A Buy, Sell, or Hold Now?\nSHOP Stock is a Hold for me.\nShopify is currently valued by the market at consensus forward fiscal 2021 and 2022 Enterprise Value-to-Revenue multiples of 37 times and 28 times, respectively based on S&P Capital IQ data. SHOP also trades at 214 times consensus forward FY 2021 EV/EBITDA and 195 times consensus forward FY 2022 EV/EBITDA. Shopify's current valuations are a reflection of the market's substantial growth expectations.\nGiven that Shopify's revenue and earnings growth are expected to moderate significantly in the quarters ahead, a further de-rating of valuations for Shopify is a real possibility. As a reference, Shopify traded as high as 49 times consensus forward next twelve months' Enterprise Value-to-Revenue and 526 times consensus forward next twelve months' EV/EBITDA in July 2021 as per S&P Capital IQ data, prior to the stock's recent share price correction in the last few months.\nI do like Shopify's long-term growth prospects, but Shopify is not a Buy now, given its rich valuations and the risk of a slower-than-expected growth which could further disappoint the market. Instead, I view a Neutral rating as fair for SHOP now.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":855064218,"gmtCreate":1635316598503,"gmtModify":1635316598593,"author":{"id":"4087443275212920","authorId":"4087443275212920","name":"XWB","avatar":"https://static.tigerbbs.com/4ef27121d1015c7d31eb417553b2e797","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/855064218","repostId":1196561975,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6342340,"gmtCreate":1635317408214,"gmtModify":1635317408246,"authorId":3577782004325702,"author":{"id":3577782004325702,"authorId":3577782004325702,"name":"Evanchills","avatar":"https://static.tigerbbs.com/fda6badb7336a9249a031585d040ffde","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":855064218,"type":1,"supId":0,"prevId":0,"content":"like","text":"like","html":"like"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":15,"commentSize":1,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.25.1","shortVersion":"4.25.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1196561975"}