AI stocks have been the hottest thing on the stock market for almost three years now. Since the beginning of 2023, the tech-heavy U.S. NASDAQ Index has risen 117%, nearly 53% on a compounded annual (CAGR) basis. This feat has been all the more impressive given that interest rates are currently higher than average, and were actively rising during the early months of 2023. Normally, stocks go down when interest rates go up.
So, AI has been a big win for the companies at the forefront of the AI revolution. In this article, I explore one Canadian stock that could be the stock market’s next big AI winner.
Shopify
Shopify Inc (TSX:SHOP) is a Canadian e-commerce tech company that provides a platform to help merchants sell their goods online. The company uses AI in many parts of its business, both internally and in products sold to end-users. Internally, Shopify uses AI to improve the efficiency of its operations. In products, it uses AI to automate key aspects of e-commerce, such as marketing and creative. The company even recently launched its own AI assistant called Sidekick, which can answer users’ questions about Shopify products!
AI use at Shopify
The use of AI at Shopify comes in three different forms:
- Sidekick, the AI chatbot that helps merchants understand the Shopify platform better.
- Shopify Magic, which helps with image editing, email marketing, and customer service. The image editing AI can transform product images with just a single prompt, saving time that in the past would have been spent working in Photoshop.
This is a pretty impressive suite of tools, and Shopify Magic is only in its early days of being mass market. As the product evolves and grows, it will probably get even better than it already is.
A high-quality niche
Moving on now to non-AI aspects of Shopify’s business:
The company has a very high quality niche within the e-commerce space, one that not many competitors can match.
Shopify sells an e-commerce platform that allows vendors to have their own website, branding, and checkout system. This leads to more brand differentiation on Shopify sites compared to Amazon (NASDAQ:AMZN) product pages. “One stop shop” sites like Amazon cannot offer the same level of differentiation and exclusivity on their website, which is geared toward attracting as many vendors as possible, including “low budget” vendors. “Prestige” brands do not usually want to be seen alongside such vendors, but Amazon’s format requires that they be shown that way. So, Shopify has an edge that its biggest competitors are “blocked” from countering effectively.
True, Amazon could launch a stand-alone product without “Amazon” branding that offers many of the same features as Shopify. However, it tried to do that in the past, failed, and threw in the towel. Also, other companies that have created Shopify-like solutions have become irrelevant due to Shopify’s greater name recognition. This means they’ll struggle to get the money they’d require to compete with Shopify effectively.
High and persistent growth
Shopify’s many intrinsic advantages have translated into solid financial performance. This can be seen first and foremost in the company’s growth rates. In the last 12 months (LTM), the company’s revenue, earnings and free cash flow (FCF) have grown at 29%, 83%, and 23% respectively. The five-year compounded annual growth rates (CAGR) in revenue and FCF were 36% and 57%, respectively (the five-year CAGR growth rate in earnings is non-meaningful due to earnings having been negative five years ago). So, Shopify has been doing some growing.
Increasing profitability
Another way in which Shopify is improving financially is in terms of profitability. In the LTM, the company had a 50% gross margin, a 15.4% EBIT margin, a 23% net income margin and a 9% FCF margin. These margins are quite high and, more importantly, improved from last year, as well as from five years ago, when the company wasn’t even profitable.
In sum: Shopify has come a long way. Potentially, it could be the next big AI winner.
