$Shopify(SHOP)$ Resource: Motley
By Parkev Tatevosian
- Shopify has majorly benefited from the rising popularity of e-commerce.
- The company's stock price has surged since pre-pandemic times, but it's currently trading at a sale.
- Plans for an upcoming stock split make Shopify all the more attractive to everyday investors.
The company's already grown massively, but today's investors can still expect excellent returns.
Shopify stock may be well-known for having benefitted from the coronavirus pandemic, as more people turned to online shopping and selling, but the company was thriving even before the COVID-19 outbreak.
This incredible return came as the company benefited from widespread growth in the public's e-commerce spending. Let's take a closer look at the business to see what's causing its enviable performance and determine if newer Shopify investors can expect similarly extraordinary returns.
Enabling e-commerce
Shopify helps to create, maintain, and grow the online presence of entrepreneurs and small and large businesses. The work includes websites and app development, payment processing, order fulfillment, and more. That's been agreat business to be in, considering that consumers have shifted their habits in recent years to shop online more. Even pre-COVID, from 2013 to 2019, e-commerce sales as a percentage of overall sales in the U.S. increased from 5.8% to 11.1%. Of course, the pandemic's forced closure of non-essential businesses further increased online purchases, raising the aforementioned figure to 14.2% by 2021.
Shopify revenue benefited from this trend, ballooning from $50 million in 2013 to $4.6 billion in 2021. With revenue growing nearly 100x, it's clear why Shopify stock has performed so well. But this impressive showing goes beyond surging sales. The company hit an inflection point in 2020, reporting an operating profit ($90 million) for the first time in years and then tripling that in 2021.
Shopify stock will likely keep succeeding due to the continued growth prospects of e-commerce. Even though online spending as a share of overall spending has risen sharply over the years, there is still much more room to go, as the vast majority of shopping is still done in physical stores. According to Statista, e-commerce's share of overall spending will rise to 21.9% by 2025. Even then, it's not difficult to imagine that e-commerce sales will outpace expected growth, a notion that makes Shopify investors excited about the company's future.
IMAGE SOURCE: GETTY IMAGES.
Shopify stock is as cheap as it's been in years
Despite its massive surge in stock price, Shopify is as cheap as it's been in years. That's because the company justifies a higher share price with increased sales and cash flow. As illustrated in the chart below, Shopify's current price to free cash flow of 169 is also near the lowest it's ever been. We see a similar trend when looking at the company's price to sales (P/S) ratio, which, at 16.7, is just about the lowest it's been in the last five years.
What's more, the company just announced plans for a 10-for-1 stock split, which would make the stock even more affordable for everyday investors. The split will need to be approved by a majority of Shopify shareholders at a June 7 meeting before going into effect.
Admittedly, Shopify's chances of duplicating the plus-2,000% returns it's seen since 2016 over the next five years are slim. That said, the company has excellent prospects and is riding tailwinds from rising e-commerce spending and inexpensive valuations. All this means thatinvestorsbuying thestocktoday could still benefit from remarkable gains in the future.
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