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Shopify Could Be on the Verge of Another Run Higher

September 16, 2021 / By /
Stock (Symbol)

Shopify (SHOP)
Stock Price

$1478
Sector
Technology
Data is as of
September 8, 2021
Expected to Report
October 27
Company Description
Shopify Inc. (Shopify) provides a cloud-based, multi-channel commerce platform designed for small and medium-sized businesses. The Company offers subscription solutions and merchant solutions. The Company’s software is used by merchants to run their business across all of their sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts and marketplaces. The Shopify platform provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships and leverage analytics and reporting all from one integrated back office. The Shopify platform includes a mobile-optimized checkout system, which is designed to enable merchants’ consumers to buy products over mobile Websites. Its merchants are able to offer their customers the ability to check out by using Apple Pay. Source: Thomson Financial
Sharek’s Take
David SharekShopify (SHOP) could be on the verge of breaking out to new All-Time highs and making a run higher as management continues to improve the platform, and take the company to the next level of ecommerce. The company is developing Store 2.0 which added new updates like features and functionality in their online platform to help merchants build the future of e-commerce. These were more flexible and customizable storefronts, faster and customizable checkout, and economic model update. The company added new features to Shop like analytics dashboard, automated marketing tools, in-app cart, and checkout. Shopify already has a buy-now, pay-later option (with Affirm) and is now focused on improving International ecommerce by helping merchants with legal issues and taxation when selling within other countries (like what Global-E does for big companies).

Shopify is an e-commerce platform for merchants to sell their goods both online and in-store. Management is focused on building an operating system that will shape the future of retail by allowing people to start and manage online and even physical stores. SHOP basically saw the obstacles e-commerce stores face when selling online, then tackled them one-by-one. What makes the company special is it helps the small business owner in many ways, including advertising, product storage, and shipping. The company allows more than 1 million merchants to have a sharp-looking online store (and/or physical store), process orders and payments, manage inventory, and see analytics. The company even has a set of hardware owners can purchase, including cash drawers, receipt printers, iPad stands, and barcodes as well as barcode readers. Pricing for Shopify is: Basic $29 a month, Shopify $79 a month, Advanced $299 a month, of Shopify Plus $2000+ a month. No setup fees. Here’s a brief overview of some of the options Shopify offers to merchants:

  • In April 2022 Shopify launched Shop, its shopping app which is like a digital mall of different Shopify stores and a personalized feed of recommendations to customers. Features include accelerated checkout with your personal info already saved, buy-now-pay-later in 4 installments, and order tracking. Shopify has integrated sales channels from Facebook shops, Walmart and Pinterest to sell in more places, as well as marketing channels such as TikTok. 
  • Shopify Payments lets merchants accept credit cards and other payment methods without needing a third party.
  • Shopify Plus is enterprise-grade solutions for high volume merchants. Shopify Plus Admin is a back end for merchants to manage their businesses, including multiple stores.
  • Shop Pay is a quick checkout app that remembers a users address and credit card info, resulting in 4x faster checkout and 2x better conversions than regular checkout. Shop Pay is available to all merchants in the U.S. on Facebook, will be available to non-Shopify merchants on Facebook and Google later this year. As of last qtr, Shop Pay has facilitated $30 billion in merchandise since its launch in 2017.
  • In June, Shopify launched Shop Pay Installments, which gives buyers the opportunity to pay via installments with no fees. This is the buy-now, pay later system. Last qtr, Shopify released Shop Pay Installments to all merchants in the U.S.
  • Shopify Shipping allows shops to connect with shipping carrier accounts, calculate shipping rates, print labels, and get reduced rates.
  • Shopify Fulfillment Network, which consists of fulfillment centers customers can utilize to store product and offer low-cost delivery. Software allows online stores to track inventory and even ship from a chosen location. Last qtr, Shopify introduced new features to Shopify Fulfillment Network such as improve shipping speed and preference management. Credit Suisse estimates SFN could generate 29% of total gross profits in 2030.
  • Shopify Balance is cash flow software within a no-fee business account that gives money management tools to track expenses and pay bills. Merchants also get a debit card with cash back. Shopify Balance will give merchants an account similar to a bank, and that gives the company enormous growth opportunity.
  • Shopify Capital is short-term business loans to merchants. Last qtr, merchants in the U.S., Canada, and the U.K. received $363 million in merchant cash advances and loans from Shopify Capital, up 137% from a year-ago period.

Here are some financial highlights from last qtr:

  • Profits: up 113%. Triple-digit profit growth is a key characteristic of top stocks.
  • Revenue: up 57%.
  • Merchant Solutions: revenue up 52%to account for  70% of total company revenue.
  • Subscription solutions: revenue up 70%, and was 30% of total company revenue.
  • Gross Merchandise Volume: up 52%.
  • Monthly recurring revenue: up 67%.

Shopify is a young company. It was founded in 2006 and headquartered in Ottawa, Canada. The stock had its IPO in June 2015 at $27. This qtr, with SHOP around $1478, the stock’s growth has been rapid. But so have profits, which went from -$0.13 per share in 2015 to $3.98 in 2020. The P/E is 223, which sounds high, but profits are expected to climb from $3.98 last year to $35.84 in 2025. We have to understand this might be the tip of the iceberg in terms of profitability. SHOP is part of the Growth Portfolio. The stock has around 40% upside to my 2022 Fair Value of $2107.
One Year Chart
This looks like a cup-and-handle chart pattern. Notice the U shaped formation from February to June, then the stock saw a surge higher from $1250 to $1500. In July, the stock broke out and pushed past $1600, but has since fallen back into the base. Note that this is the price the stock was at after the jump in June. The only thing that would make the chart better is if the stock continued to retreat slowly below $1400. That would shake out some weak shareholders. A close over $1600 would be a break out and that would be a buy signal.

This P/E of 223 is much lower than last qtr’s P/E of 346. The P/E was 306 3QtrsAgo, and 263 4QtrsAgo. But I think this figure isn’t really relevant as the stock is selling for a multiple-of-revenue.

The Est. LTG of 31% is up from 28% 2QtrsAgo. This figure was 38% 3QtrsAgo. I think SHOP as a 50-65% profit grower over the next 3-5 years.
Earnings Table
Last qtr, Shopify delivered 113% profit growth which beat estimates of -9%. Total revenue climbed 57%, which was decelerating growth from 110% 2QtrsAgo. This was a record qtr for the company as it reached $1 billion the first time. Shopify has two sources of revenue: Merchant Solutions (payment processing fees from Shopify Payments, transaction fees, referral fees, POS hardware) and Subscription Solutions. Merchant revenue grew 52% primarily due to GMV growth (52%). Subscription revenue grew 70%, primarily due to strong growth in monthly recurring revenue (up 67%). 

Management commented “strong growth in merchant sales, combined with increased GMV penetration of Shopify Payments, merchant adoption of Shopify Capital and Shipping drove revenue” (source Shopify Earnings call).

Annual Profit Estimates continue to climb higher. And there are big numbers on the horizon. It’s hard to claim this stock has a high P/E when looking out to what the company might earn in 3-5 years.
2021 $6.62
2022 $6.43
2023 $9.48
2024 $20.44
2025 $35.84

Qtrly Estimates are for 4%, -18%, -40%, and -35% profit growth the next 4 qtrs. Profit estimates for these next 4 qtrs seem too low.
Fair Value
3QtrsAgo this stock sold for 37x 2021 revenue estimates. 2QtrsAgo it sold for 43x sales. Now it sells for 39x sales. Thus, my Fair Value is 42x revenue.

Also, during the past three qtrs, 2021 revenue estimates rose from $4.1 billion to $4.4 billion to $4.6 billion, while 2022 estimates increased from $5.4 billion to $5.9 billion to $6.2 billion. Increasing estimates is good because we may be underestimating a company’s potential. It also makes it hard to claim the valuation is too high, as we don’t really know what the company is capable of.

Current:
39 x $4.6 billion in revenue = $183 billion market cap
$183 billion / 124 million shares = $1478

2021 Fair Value:
42 x $4.6 billion in revenue = $195 billion market cap
$195 billion / 124 million shares = $1573
Upside/Downside: +6%

2022 Fair Value:
42 x $6.2 billion in revenue = $261 billion market cap
$261 billion / 124 million shares = $2107
Upside/Downside: +43%
Bottom Line
Shopify (SHOP) has established itself as a true franchise of a stock. It’s really similar to Amazon in many ways (including the stock’s exceptional performance). Within Annual Profits, note the company has been profitable since 2017. SHOP originally broke out in January 2017 at $50, and since it would go on to make $0.16 that year, the stock sold for 313 times future earnings. That’s a high P/E, and conservative investors might have passed on buying (I did). The stock broke out a second time in February 2019 at around $175. I added a small position of SHOP to my Growth Portfolio on November 19, 2019 at ~$323.

This company has multiple catalysts. This time its buy-now, pay-later and enhanced International ecommerce abilities. What’s next? We likely don’t know. It could be something that could push these far-out profit estimates above where they are now. And that’s why this stock should have the premium validation that it does (~40x revenue). 

SHOP moves up from 17th to 11th in the Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

11 of 33

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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