Shopify (NYSE: SHOP) is one of the world's largest e-commerce platforms. Using the company's software and services ecosystem, virtually any person or company can open an online store. It's getting harder to call the company a hidden gem -- the stock is worth nearly $90 billion and has been public for almost a decade. That said, Shopify has fallen out of favor with investors over the past few years.
The stock peaked in 2022 thanks to pandemic-fueled growth, but it has tumbled over 60% since then.
As bearish as the situation might seem, here are six reasons to buy Shopify stock like there's no tomorrow.
1. Textbook network effects
A company can enjoy different competitive advantages. Shopify has established network effects throughout its business model. A network effect is when a product or service improves the more people use it. Here's an example: An estimated 2 million merchants, from solopreneurs to corporations, use Shopify. Such a large user base means third-party companies wanting to do business with those merchants must develop integrations and apps for Shopify.
As a result, Shopify's app store offers more than 13,000 apps today. Without similar third-party support, Shopify's competitors will likely struggle to provide a similar user experience. It's a similar effect on the data side, where Shopify can gather merchant and transaction data from a large base that gives it insights smaller competitors don't have. Shopify's platform becomes stronger the more merchants use it. And the better Shopify gets, the more merchants gravitate to it.
2. A merchant-friendly business model
Shopify has competition, including e-commerce giant Amazon , which also lets merchants sell on its platform. Access to Amazon's wide-reaching marketplace is a dream come true at first glance. However, Amazon doesn't necessarily have its merchants' best interests at heart. Amazon's reputation has taken a hit after facing allegations over the years of using its power over merchants to dictate pricing, favor some sellers over others, and even compete with merchants by undercutting popular products with its own versions.
On the other hand, Shopify is purely a products and services ecosystem. It doesn't compete with its customers -- the company benefits when its merchants succeed. This fundamental difference has helped Shopify remain a go-to e-commerce platform for many businesses.
3. The early innings of e-commerce
Consumer spending is an enormous chunk of the global economy, but according to eMarketer, e-commerce has still penetrated just:
- 15% of retail in North America
- 11% of the Asia-Pacific region (excluding China)
- 10% of Europe, the Middle East, and Africa
Shopify estimates its total market opportunity grew to $849 billion last year, and it only serves 2% of that addressable market today.
4. An asset-light business
No company is perfect. In 2022, Shopify spent $2.1 billion to acquire a logistics start-up called Deliverr to support its efforts to compete with companies like Amazon on order fulfillment. However, management pivoted the following year and sold its logistics assets to another company, resulting in a large impairment charge.
While it was an expensive mistake, management's about-face should prove to be the right decision for the company. Sticking to an asset-light business model has improved Shopify's free cash flow generation. The company converted just 1% of revenue to cash in 2019. Its margin improved to 13% last year, and it hit 16% in the second quarter . A business that generates a lot of free cash flow can return more money to shareholders via dividends or share repurchases, or invest in growth without having to borrow money.
5. Strong growth ahead
Shopify is poised to enjoy consistent growth from expanding its product and service offerings , in addition to the broader e-commerce tailwind. Analysts expect at least 20% annual revenue growth from Shopify through 2026. Additionally, they're forecasting annualized earnings per share growth of 33% for the next three to five years.
6. A declining valuation
It's time to add some context to Shopify's growth outlook. Today, the stock trades at a forward price-to-earnings (P/E) of 67. That's a premium valuation for any company, even one growing like Shopify. But the stock started 2024 with a forward P/E ratio of more than 100, and it's been consistently declining through the year.
Factor in Shopify's expanding ecosystem and the enormous remaining market opportunity in e-commerce, and investors can see how the company can grow into that valuation long term.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy .
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