Investing in stocks with solid fundamentals aligned with secular tailwinds and competitive advantages over peers can help investors leverage the power of compounding and create significant wealth over time. The success story of Shopify (TSX:SHOP) stock serves as a compelling example of the rewards of long-term investing.
Consider Shopify’s trajectory since its market debut in May 2015. At its peak in November 2021, Shopify’s stock had surged more than 6,700% from its initial public offering price. Picture investing $20,000 initially in Shopify shares, which would have ballooned to a staggering $1.37 million in under a decade.
Notably, Shopify stock has corrected significantly from its COVID-led peak. It is down about 54% from its high of $222.87, reached on November 15, 2021. Despite this decline, Shopify stock has been up about 3,159% since listing on the exchange, representing a compound annual growth rate (CAGR) of 47.5%.
While such extraordinary returns are exceptional, it highlights the potential of investing in undervalued stocks with promising long-term prospects. Allocating a portion of your savings to such stocks can help you earn substantial returns in the long term.
Given this context, let’s delve into the factors to understand why Shopify stock still possesses the key ingredients to make you a millionaire in the future.
Factors to drive Shopify stock higher
Shopify has been a prime beneficiary of the ongoing digitization trend. The company offers an e-commerce platform allowing businesses to set up and manage online stores. Given the structural shift towards omnichannel shopping models and Shopify’s diverse offerings, including payment processing, shipping solutions, and marketing tools, this Canadian tech company will likely witness a significant uptick in demand for its services, which will drive its financials and share price higher.
Besides secular tailwinds, the increase in subscription solutions revenues led by growth in Shopify Plus plans and POS (point of sale) Pro offerings augur well for the future as they add stability and visibility to its earnings. It’s worth highlighting that Plus merchants primarily drive Shopify’s gross merchandise volume (GMV). Moreover, these merchants also have a higher retention rate.
The e-commerce company is also likely to benefit from the strength in its merchant solutions revenues, driven by the increased adoption of Shopify Payments (including payment processing and currency conversion fees) and Shopify Capital (lending solutions). The increase in GMV and continued penetration of Shopify Payments will likely boost Shopify’s financials by enabling it to cross-sell additional solutions to its merchant base.
While Shopify is poised to capitalize on the digital shift, its focus on cost-reduction measures, shift towards an asset-light business model, and integration of artificial intelligence (AI) technology in its products position it well to generate sustainable earnings in the long term.
Bottom line
In summary, Shopify is well-positioned to benefit from the shift in selling models towards online platforms. Its multi-channel platform enables merchants to market and sell their products through over a dozen sales channels, including web and mobile storefronts. Moreover, its focus on growing its merchant base, higher penetration of Shopify Payments, innovative product launches, and improving take rate bode well for growth.
While Shopify stock has the potential to make you a millionaire, it’s worth noting that it is trading a next 12-month enterprise value to sales multiple of 10.7, which is much below its historical average of 27.8. This implies that Shopify stock is undervalued and provides an excellent buying opportunity near the current levels.
