Shares of Shopify Inc. (SHOP) finished the day up 2.8% in anticipation of strong holiday sales. The stock is now up 168.5% for the year and 231.2% since its March low. SHOP has benefited as much as almost any company from the pandemic-induced increase in e-commerce. The lockdowns resulted in physical retailers shutting down their stores and forcing people to shop online.
SHOP offers an e-commerce platform to small and midsize businesses. It operates through two segments: subscription solutions and merchant solutions. Its solutions let small enterprises to get online quickly and inexpensively. Merchants pay a monthly fee to access the platform that provides all the tools necessary to build and manage their e-commerce store. The company’s solutions were perfect for small businesses that had to close their physical storefront during the lockdown and get online quickly.
Its merchant solutions are add-on products that facilitate e-commerce, including Shopify Payments that enable merchants to accept payments, as well as Shopify Shipping and Shopify Capital. The company has a stable revenue model based on its subscription-as-a-service (SaaS) business, but it is also generating revenue from customer sales. So, the more sales a merchant customer makes, the more revenue SHOP makes.
Thesis for Buying
The growth in e-commerce had already started before the pandemic, but COVID just drove this trend into hyperdrive. Even after positive news of vaccines from Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA), when the stock initially fell, SHOP rebounded to gain 17.8% in November, while other stay-at-home stocks plummeted. This was due to strong financial results for the third quarter.
In the quarter, sales jumped 96% year over year to $767 million. This was driven by a 48% year over year increase in revenue from the subscription solutions segment as more merchants joined SHOP’s platform to accommodate the consumer shift to e-commerce. Many entrepreneurs saw an opportunity during the pandemic to open their own online stores, while many larger retail companies didn’t have the infrastructure in place to handle e-commerce orders.
The strong results led SHOP to generate profit for the quarter, which it could not do during the same period last year. Its gross merchandise volume was up 109% year over year to $30.9 billion. Gross merchandise volume refers to the volume of goods sold via merchants to customers. The company also launched a TikTok social media channel to help merchants make sales. This is in addition to its other sales channels such as pop-up stores, kiosks, and social networks such as Facebook (FB).
After the company reported a strong quarter, it announced record sales from Black Friday and Cyber Monday, generating $5.1 billion in sales. This was up 76% year over year, from $2.9 billion in sales in the same period last year. More than 44 million shoppers bought products from SHOP merchants. This is a harbinger for things to come for the rest of the holiday season.
I expect this year to be especially strong in holiday sales. This is due to pent-up demand from people forced to stay at home, optimism for the economy after the positive vaccine news, and more money on hand for many people that didn’t spend as much this year on travel and restaurant dining.
SHOP has a whopping five-year revenue growth average of 70.5%, and sales are expected to grow 32.6% next year. The company also has a healthy balance sheet with $6.1 billion in cash as of the end of the quarter. This is up from $2.7 billion in the third quarter last year. Long-term debt is only $892 million, and the firm’s current ratio is comfortably high at 17.9.
The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” for Trade Grade and Peer Grade, and a “B” for Buy & Hold Grade. These are three out of the four components that make up the POWR Ratings. It is also the #1 ranked stock in the Internet – Services industry.
While the stock currently sports a sky-high valuation (trailing P/E of 654.59), I think that valuation is justified. Some investors may be concerned that the company’s growth this year was only driven by the pandemic; I disagree. I believe the pandemic obviously contributed to the stock’s performance and revenue growth this year, but the company was already headed in this direction, and the pandemic accelerated its growth trajectory.
SHOP’s revenue in the third quarter of 2019 was up 44.7%, months before the pandemic started. Plus, the company had strong year over year growth in both the second and third quarters of this year. These quarters had very different shopping experiences as many stores had opened back up in the third quarter after lockdowns were removed. In addition, Analysts are forecasting $3.74 billion in sales next year and more than $5 billion in 2022. I expect its growth to continue and consider it a “Buy” right now.
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SHOP shares fell $1.87 (-0.18%) in after-hours trading Thursday. Year-to-date, SHOP has gained 168.47%, versus a 15.58% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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