To The Moon

This e-commerce company has fallen out of favor on Wall Street.

$Shopify(SHOP)$ bulls have had a tough year. In the early days of the pandemic, the Canadian e-commerce company wowed Wall Street with phenomenal sales growth and GAAP profitability, but the narrative has changed. Since releasing its first-quarter earnings report, Shopify has seen its price tumble 21%, and the stock is now down 77% from its high.

Does that sell-off make Shopify a buy? Let's dive in and see if we can answer that question.

Simplifying commerce

Shopify's mission is to make commerce better for everyone. Its software helps merchants market and manage their businesses across physical and digital channels. That includes branded websites, online marketplaces like $Amazon.com(AMZN)$, and social media platforms like ByteDance's TikTok. Shopify also provides a growing number of value-added services like payment processing, cross-border commerce tools, and financing, as well as thousands of integrations through the app store.

Thanks to its breadth and ease of use, Shopify outranks all other e-commerce software vendors in terms of market presence and user satisfaction, according to the latest G2 Grid report. That has translated into market share gains. In 2021, Shopify powered 10.3% of U.S. e-commerce sales -- second only to Amazon -- up from 5.9% in 2019.

Decelerating growth

In Q1 2022, Shopify's revenue grew just 22% to $1.2 billion, a significant deceleration from 110% growth in the prior year. Additionally, gross margincontracted 350 basis points to 53%, and the company generated negativecash from operationsof $54 million. But tough macroeconomic conditions weighed heavily on the entire commerce industry. Amazon actually saw online store revenue drop 3% year over year in Q1, and it posted its first quarterly loss since 2015. But Shopify continued to grow and gain market share both online and offline in the U.S.

Better yet, Shopify's financial performance still looks impressive over a longer time horizon.

DATA SOURCE: YCHARTS. TTM = TRAILING-12-MONTHS. CAGR = COMPOUND ANNUAL GROWTH RATE.

Growing market opportunity

Management currently puts its addressable market at $160 billion, but that figure should get bigger as e-commerce continues to gain popularity. To capitalize on that, Shopify is executing on a robust growth strategy. It recently added $JD.com(JD)$ as a sales channel, allowing merchants to list products on one of the largest e-commerce sites in China, which itself is the world's largest e-commerce market.

Additionally, Shopify launched its accelerated checkout solution (Shop Pay) for all merchants on $Alphabet(GOOGL)$'s Google and $Meta Platforms, Inc.(FB)$‘s Facebook and Instagram. That extends its ability to monetize commerce beyond the borders of its platform. Shop Pay also powers the Shop mobile app, a tool designed to drive consumer engagement through personalized product suggestions.

Finally, Shopify closed a record number of Shopify Plus deals in March 2022, meaning it's gaining traction with larger sellers. Shopify Plus is its high-end e-commerce software, and it already powers brands like Allbirds and Figs, but as more large enterprises join, it could supercharge growth by boosting gross payment volume (i.e., Shopify takes a cut of payments).

However, Shopify's most ambitious growth initiative is the Shopify Fulfillment Network (SFN).

Democratizing fulfillment

Thanks to Amazon's efforts, many consumers now expect two-day or even next-day delivery when they shop online. But that puts small businesses at a disadvantage because they typically lack the resources to offer that option at checkout. Shopify aims to level the playing field with the SFN.

In 2019, it acquired robotics specialist 6 River Systems, a company started by former executives at Kiva Systems (now Amazon Robotics). That move upgraded Shopify's portfolio with collaborative mobile robots -- autonomous machines that accelerate warehouse operations by helping employees pick and sort products more efficiently.

Last week, Shopify announced its $2.1 billion acquisition of Deliverr, a company that already offers logistics and fulfillment services to merchants across platforms like Amazon,$Wal-Mart(WMT)$, and $Etsy(ETSY)$ . That move will bring artificial intelligence (AI) software for demand forecasting and inventory management to the SFN. Better yet, it will give Shopify access to Deliverr's network of warehouses, carriers, and last-mile partners, which means Shopify merchants will be able to offer next-day or two-day delivery across the U.S.

Here's the big picture: In the short term, the SFN will undoubtedly put pressure on Shopify's margins, and that could mean volatility for shareholders. But in the long run, the SFN could significantly reinforce Shopify's competitive edge by democratizing fulfillment services and helping individual businesses compete more directly withretail titans like Amazon.

Is Shopify a buy?

Shopify is a leader in e-commerce, an industry that will continue to grow for many years to come. Better yet, the founder-led management team is executing on an ambitious growth strategy that could further differentiate the business. And with the stock trading at 10 times sales -- its cheapest valuation in the last five years -- I think Shopify is a screaming buy.

That doesn't mean the stock won't fall further. But a decade down the road, I think this growth stock will be worth significantly more than it is today.