The Canadian e-commerce giant Shopify (TSX:SHOP) has revolutionized the way businesses of different sizes sell products online. Even though e-commerce has lost some of its lustre to newer hype cycles, such as generative AI (artificial intelligence), it is still considered a transformational megatrend in the market. So, with the constant evolution of this industry, the question every investor might have is: will Shopify survive and thrive over the next five years?
Let’s dive into this question, and see what may drive this growth stock higher, and what risks could be on the horizon.
What does Shopify do?
As mentioned, Shopify is among the leading e-commerce platform providers for small and medium-sized businesses setting up online shops. The company generates most of its revenue and cash flows primarily from transaction fees charged to businesses using its platform. Additionally, it earns from software-as-a-service through various other services. The company’s resilient and stable cash flows provide Canadian growth investors with a clear forecast of future profitability based on market share expansion metrics.
Despite facing a decline post-pandemic, Shopify has maintained steady growth. Its innovative technology enables merchants to manage, design, market, and sell their products and services, proving durability through various market cycles.
Recovery mode
Similar to many online-centric companies, Shopify experienced a surge in business and its stock price during the COVID-19 pandemic, reaching an all-time high of $169 (adjusted for the stock split) in late-2021. During this period, numerous small businesses joined Shopify’s platform to cater to the increased stay-at-home demand for goods and services. However, factors such as slowing growth, rising interest rates, and inflation eventually dampened the market sentiment.
Throughout 2022, Shopify’s growth stagnated, and its stock price significantly dropped, now sitting 66% below its peak. The first-quarter results, which were weaker than anticipated, have not improved the situation much.
Shopify’s revenue rose by a solid 23% year over year to $1.9 billion, as more small businesses and merchants adopted its online storefront solutions. However, net income shifted from $75 million to a loss of $281 million due to a non-cash charge related to the sale of its logistics arm to Flexport in mid-2023. The most significant challenge, however, was Shopify’s lacklustre future guidance.
Since the first-quarter earnings announcement on May 8th, Shopify shares have plummeted by 25%, and the decline continues at the time of writing. The company’s high valuation, with a price-to-earnings ratio of 60 times, suggests that even minor disappointments can lead to substantial drops in stock value.
Lacklustre near-term outlook
For the second quarter, Shopify’s management anticipates a deceleration in year-over-year revenue growth to the high teens, with gross margins expected to decrease by 50 basis points. This conservative forecast might indicate a slowdown in Shopify’s rebound in the short term. However, long-term investors might still see potential.
That said, the company’s management team appears to be positioning Shopify for success over the next five years. The platform continues to attract large clients, such as Coach Outlet, owned by Fashion holding company Tapestry. Additionally, Shopify’s move towards enterprise-level solutions for larger businesses could boost growth and provide necessary diversification away from the potentially volatile small business sector. The company is also focusing on international expansion.
Bottom line on Shopify
Shopify’s future depends on its ability to adapt and seize opportunities in the evolving e-commerce landscape. The global expansion of e-commerce offers substantial potential, though competition and regulatory challenges remain. Investors considering Shopify on the TSX should closely monitor the company’s progress on these fronts. While the coming five years may present various challenges, the company’s solid foundation and growth potential position it as a noteworthy contender in the e-commerce sector.
