Could Shopify Serve as the Key to Achieving Millionaire Status by 2035?
Shopify (with a 1.60% increase in share price marked as SHOP 1.60%) has become the preferred e-commerce solution for numerous merchants worldwide, giving it significant clout in the industry. This dominance also means it stands to benefit from escalating e-commerce trends. As per Statista, e-commerce sales in the U.S. are estimated to surge from 16.6% of retail sales in 2021 to 20.6% by 2027.
The market is showing high expectations for Shopify, as reflected in its high-valued stock. Could Shopify serve as the key to generating millionaire status over the next decade?
The leading contender in a thriving sector
Shopify's e-commerce niche is bolstering small businesses through its comprehensive platform. It functions as the silent backbone, enabling numerous retailers to join the e-commerce bandwagon and participate in the e-commerce revolution. Although Shopify isn't as large as Amazon, which accounts for 37.4% of all e-commerce as a business, Shopify has managed to keep pace competing as a platform.
In the third quarter, Amazon's online stores and third-party vendors earned $100 million, while Shopify's platform processed $70 million in gross merchandise volume (GMV). Shopify's GMV surged 24% year over year in Q3, outpacing Amazon's online sales, which increased 7%, and third-party sales, which increased 10%. These figures represent the sales volume in the quarter.
Shopify does not consider the GMV as revenue as it only collects fees related to its clients' sales. Its revenue is derived from two primary sources: Monthly subscription fees and payment processing fees. The payment processing business is the primary revenue source, accounting for 72% of the total in Q3.
The company's sales growth is on an upward trajectory, increasing by 26% year over year in Q3. Shopify is also transitioning into profitability. Operating income increased from $122 million last year to $283 million this year in Q3, while net income rose from $718 million to $828 million. Free cash flow grew from $276 million to $421 million, and the free cash flow margin improved from 16% to 19%.
Investors were elated by the Q3 report and the fourth-quarter guidance, which anticipates an acceleration in sales growth and a free cash flow margin similar to the third quarter's.
Favorable winds and opportunities
Shopify's allure lies in its unlimited potential. Part of that stems from the rise of e-commerce and its continual innovations. In the short term, the company has favorable winds in the form of an improving economy as inflation wanes and interest rates descend.
Although e-commerce is its mainstay, Shopify also offers physical store solutions for comprehensive omnichannel packages. These include hardware products like point-of-sale (POS) devices and software services like payment processing and operational management. It's a suitable platform for sellers aiming to fuse their physical locations with a digital presence using a seamless program.
Shopify has widened its offerings beyond complete packages, catering to larger, enterprise clients seeking specialized services like a new payment processor or POS provider. Shopify envisions its future as an integrated e-commerce platform, with partnerships with numerous major players like Amazon and PayPal. It recently became Roblox's first commerce integration partner.
Shopify's largest potential lies in international businesses, where it is thriving at an even faster pace. International merchants increased by 36% in Q3. It's also introducing international sales to all clients via Shopify Managed Markets, which recently debuted. Merchants reportedly expanded the countries they sold to by 83% after joining the program, and international sales surged over 40% on average for participants.
Priced for perfection
The only drawback is the price. Shopify shares trade at a price-to-sales ratio of 18 and a forward price-to-earnings ratio of 76. This premium valuation implies that Shopify shares will drop in value upon the release of unfavorable news — something it has experienced in the past. To maintain these levels, Shopify must meet the market's expectations consistently.
Over the next 10 years, Shopify's sales and earnings multiples should decrease as the company grows. If it achieves a compound annual growth rate (CAGR) of 15%, it will reach trailing 12-month sales of $33 billion. At a price-to-sales ratio of 5, which I've randomly selected to represent a significantly lower multiple, it will have a market cap of $165 billion, which is only 11% higher than current levels. However, can Shopify sustain its premium valuation for the next 10 years?
To achieve higher stock prices, Shopify must sustain a CAGR greater than teen percentages or maintain a higher valuation. But it won't warrant the higher valuation unless it's also delivering on the higher sales growth. A CAGR of 20% over 10 years with a price-to-sales ratio of 9, half of today's figure, brings us to a market cap of $450 billion, which is approximately double the current level. These aren't groundbreaking figures.
This is merely an exercise to estimate potential future developments. I don't believe investors can rely on Shopify as a ticket to millionaire status at the moment, despite its impressive performance. However, I would suggest keeping a watch on Shopify in case its shares significantly drop.
Shopify's success in the e-commerce sector has attracted investors seeking lucrative opportunities. With the company's impressive revenue growth and transition into profitability, some individuals might be considering investing in Shopify stocks to potentially boost their wealth.
In the context of finance and investing, Shopify's growth trajectory has placed it in a position where investors are closely monitoring its performance to determine if it's an appropriate opportunity for diversifying their portfolios and potentially generating significant returns.
