“On the moon” would be the overly optimistic answer to this question, and “in a stagnant rut” would be the other end of the spectrum, i.e., fully pessimistic. But before we strive to find the realistic expectations and projections regarding Shopify’s (TSX:SHOP)(NYSE:SHOP) future, there are a few things we need to understand about the e-commerce market which Shopify serves.
The projections regarding e-commerce growth in the next five years are quite varied. One estimate puts the global e-commerce sales compound annual growth rate (CAGR) between 2021 and 2025 at 6.2% (varies a lot from country to country). Another puts the CAGR for e-commerce market growth between 2021 and 2026 at 16%.
The core similarity between the two is “sizeable” growth, which means that the e-commerce market is not as close to reaching its saturation point as you might think.
And if the e-commerce market as a whole is growing, it leaves a lot of growth room for a key player like Shopify. But an argument to counter this “growth potential” is Shopify’s brutal overvaluation. The five-year future may hold two things for Shopify. Growth at an appreciable rate or fall from its current precarious peak.
The case for stagnation and fall
Over the years, Shopify has not just been overvalued but brutally, abnormally overvalued. It’s currently trading at a price-to-earnings of 80, which is almost discounted compared to the company’s previous price-to-earnings numbers. The price-to-book is quite high at 19.4 times.
This valuation coupled with the fact that Shopify has lived through the initial boom of the e-commerce market (which was expedited during the pandemic), doesn’t bode very well for Shopify.
Shopify offers an all-in-one e-commerce platform that allows businesses to establish an online presence. It has three different pricing plans and makes most of its money through subscriptions from its 1.7 million customers worldwide. But it is starting to face serious competition on that front.
Tech household names like Microsoft and Adobe are belatedly joining the game, but just as Shopify has the early bird advantage, they have the existing “ecosystem” advantage, especially Microsoft. If these companies start poaching potential e-commerce clients, Shopify might still be able to sustain its revenues but not grow it at the same pace as it’s growing now.
The case for growth
Tech is one of the most unpredictable sectors, and Shopify has more cards up its sleeve. Social commerce, a segment of the overall e-commerce market, is expected to boom in the coming years, and Shopify is poised to grow in this arena.
The company has also defied expectations and has grown way beyond what its valuation should technically have allowed. The company is also growing its offering and is diversifying its revenues to come from more than just its subscriptions. Its entry into the fulfillment market and a plethora of merchant e-commerce services it’s adding to the deck can result in decent revenue growth for the next five years.
Realistically, how much can this powerful tech stock grow? It’s already quite close to an all-time high of $2,000 a share mark. And it means that even for a 100% return, the stock will have to grow $4,000 a share in the next five years. Even if it’s possible, the probability and timeline might not be in your favour, and you might have a better chance of doubling your money with other stocks.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and Shopify. The Motley Fool recommends Adobe Inc. and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify.