Why Shopify Can Beat The Market Over The Next 5 Years


Shopify (NYSE: SHOP) has been a big winner during the pandemic, as its market capitalization has swelled to nearly $ 200 billion following an increase in demand for online shopping.

But Shopify is making a number of investments (including in its distribution network, Shopify Plus, and the Shop mobile app) that allow it to perform well over the next five years. In this episode of Motley Fool Live registered on October 7Fool.com contributor Trevor Jennevine explains why Shopify’s strong growth is expected to continue.

Trevor Jennevine: Then, just to talk about the financial performance of the company. Just over last year, revenue was up 85% to $ 3.9 billion, business free cash flow positive, $ 507 million free cash flow. I think one of Shopify’s underestimated assets, it has $ 7.7 billion in cash and cash equivalents on its balance sheet. This compares to about $ 910 million in short-term or long-term debt. The company really has a strong net cash flow. This gives it a lot of flexibility to pivot and make investments as growth opportunities arise. This is why I think Shopify has beaten the market for the past five years.

They have the omnichannel commerce platform, a merchant-centric growth strategy, and this has enabled them to gain a strong competitive position in the ecommerce market as a whole. Then, of course, there were tailwinds for the industry. In 2015, total global e-commerce retail spending was $ 1.67 trillion. According to e-Marketer, that number has grown by around 20% per year to reach 4.2 trillion in 2020. 20% compound annual growth rate for ecommerce spending over the past five years. This was to be around 12 percent over the next five years. Why do I think Shopify can beat the market in the next five years? I have listened to some growth opportunities here. Management is currently evaluating its market opportunity at $ 153 billion. This figure only includes small and medium-sized businesses. At the very end, I’ll cover Shopify Plus, but the business is focusing its growth on three areas.

The Shopify Fulfillment Network is the first. They’re building this, it’s a $ 1 billion investment that they made from 2019 over a five-year period. Once that’s done, it will help Shopify merchants better compete with bigger players like Amazon. Shopify will be able to offer order management services to its merchants, it will use artificial intelligence for demand forecasting, intelligent inventory allocation, intelligent order routing. Essentially, it will help merchants offload the complexity of picking, packing and shipping orders. This will help streamline this fulfillment process on the merchant side, but it will also create a fast and reliable delivery experience on the buyer side. I think this will really add to the competitive edge of the business. Having that distribution network across the United States is going to be a big plus.

The company also launched its Shop mobile app last year. It’s a tool, they call it a tool to get the buyer’s attention. If you haven’t used the app, it basically lets you track orders, discover brands, shop. It gives marketers a way to target potential customers, to target them with marketing. I think they are investing in this product and have seen good traction from users. Then they’re looking to expand internationally, and just to put it in a bit of context, around 56% of Shopify merchants are currently in North America and 50% in the US alone. North America, in 2020, accounted for about 70% of revenue, more than 70% of revenue. There is a lot of room to grow that number outside of that and they are investing in other geographies. Over the past year, they have imported their point-of-sale equipment to UK, Ireland and Australia. They see strong traction in these international geographic areas.

Then quickly, I think there are two things that some investors may be overlooking in terms of importance. Shopify has Shop Pay, they call it their accelerated payments platform. According to management, this is the most converted payment platform on the internet, but they are extending this tool from their platform. By the end of the year, traders Facebook and Google will be able to accept payments through Shop Pay even if they are not Shopify merchants. It reminds me of what Free Mercado done with Mercado Pago, how they made it available to third party sellers outside of the MercadoLibre marketplace. I think this will allow Shopify to tap into the digital payments market more aggressively. If they see success as MercadoLibre saw it, I think it could be a big growth driver. There are differences between Latin America and the main geographies of Shopify. It is absolutely not guaranteed, but there is growth potential by extending this tool outside the market.

Then the last thing I want to cover is Shopify Plus, it’s a more flexible commerce platform built for big sellers. Over 10,000 brands currently use Shopify Plus. They are actually seeing some traction with some well-known companies, General Electric, McCormick, Nestle, Netflix, and PepsiCo, to name just a few of the companies that use Shopify Plus as their ecommerce platform. I think for these five reasons, I think Shopify looks like a market beater for the next five years just like it has been for the last five.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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