Key Points
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Shopify’s recent dip came from missing Wall Street’s expectations, not from a slowdown in the business.
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Bundling stores, payments, and financing makes Shopify harder to replace as it keeps winning major brands.
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With less than 10% of global e-commerce, Shopify has years of growth ahead to justify its premium valuation.
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Shopify (NASDAQ: SHOP) shares are down about 10% over the last month, as of Nov. 5, after its latest quarterly results came in slightly below Wall Street’s expectations. Investors shouldn’t get caught up in Wall Street’s expectations trap. The reason the stock is worth buying is that Shopify is still winning business from major brands, with an enormous opportunity still ahead.
Shopify is becoming harder to replace
Shopify‘s competitive edge is bringing stores, payments, inventory, and financing together on one platform for a subscription fee. This removes a lot of friction for merchants, and as merchants engage with different services, it makes Shopify hard to replace.
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One service can open the door to a deeper business relationship. For example, Alice + Olivia decided to move its business onto the platform after starting with Shop Pay. Shopify continues to win over other brands, including Lululemon and Balmain, which went live on Shopify last quarter.
Its merchant lending business, Shopify Capital, creates another sticky relationship with merchants. In the third quarter, Shopify purchased about $1.5 billion of merchant loans and cash advances, up from $1 billion a year earlier. Financing introduces credit risk, but it gives merchants another reason to stay with Shopify, which is more important for long-term growth.
Overall, merchants sold $119 billion worth of goods, or gross merchandise volume (GMV), through Shopify in the third quarter, up 29% from a year earlier. That’s almost as much as they sold on Shopify in all of 2020, when the pandemic pushed shopping online.
A fair price for a long growth runway
Shopify handled about $477 billion in annualized GMV in the third quarter, compared with eMarketer’s estimate of more than $6 trillion in global e-commerce sales. That’s a small share of less than 10%, though Shopify includes offline sales, so this is an approximate comparison. There is still substantial room to expand.
That runway is why investors have historically paid a high sales multiple for the stock. It trades around 14 times trailing sales as of Nov. 5, which is high but in line with its three-year average. And as Warren Buffett wrote in his 1989 shareholder letter, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Shopify is a quality growth stock worth paying up for. Management expects revenue growth in the low 30% range in the fourth quarter, and with less than 10% of global e-commerce today, Shopify can sustain a high growth rate for many years. A business building sticky relationships with merchants and growing that fast is worth holding for the long term, even if it looks expensive today.
Should you buy stock in Shopify right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.
