E-commerce solutions provider Shopify (NYSE:SHOP) reported first-quarter earnings in early May which were strong enough to cause SHOP stock to pop 5% to all-time highs topping $700.
But Shopify’s blowout first-quarter earnings report will do much more than that.
Indeed, it appears that Shopify is in the midst of a breakthrough moment wherein the company turns into the commerce backbone for every small-to-medium sized business (SMB) in the world over the next few years. Thanks to this pivotal transformation, Shopify stock appears well on its way toward $1,000-plus prices.
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Does that mean it’s time to chase the rally? I don’t think so. I’m not a big fan of chasing rallies. Inevitably, the Shopify growth narrative will run into a hiccup. When that hiccup happens, the stock will drop. Buy that dip.
But it does certainly mean that every growth investor with a multi-year time horizon should have SHOP stock in their portfolio. This is arguably the market’s most exciting and powerful growth stock, with tons of upside potential still left.
Strong Earnings for SHOP
Shopify’s first-quarter earnings report was good, and broadly illustrated that the novel coronavirus pandemic is doing exactly what bulls thought it would do: spark a surge in commerce activity through the Shopify ecosystem as buyers and sellers migrate online.
Shopify’s revenues rose 47% year-over-year in the first quarter – matching 2019’s revenue growth rate – on the back of sustained 45%-plus gross merchandise volume (GMV) growth, implying that this company’s growth momentum isn’t slowing down at all.
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If anything, the company is actually gaining momentum. In the six weeks ended April 24, the number of new shoppers in the Shopify ecosystem rose 8%, while the number of new stores rose 62% and the number of consumers buying from a Shopify merchant they’d never shopped at before rose 45%.
All of that is to say the consumers and businesses are rushing with accelerating pace to Shopify amid physical store closures. That’s why Shopify’s GMV growth is pacing above 46% in the second quarter so far.
At the same time, gross margins are holding steady in the 55% to 60% range, and operating margins adjusted for acquisitions and one-time expenses continue to improve.
Huge Long-Term Potential
Strong earnings are more than just a near-term spike from Covid-19. Instead, they are the beginning of Shopify’s global transition towards becoming the backbone of modern commerce for small- and medium-sized businesses (SMBs) everywhere.
Here’s the story. E-commerce is the future of commerce, simply because it’s easier, more convenient, and involves less friction. Yet, while the e-commerce wave of the 2010s was led by Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and Target (NYSE:TGT) – i.e. retail giants – SMBs didn’t hop on the e-commerce bandwagon. Before Covid-19, about 40% of SMBs didn’t have an online presence, at all.
Then Covid-19 happened. Physical stores across the world closed. This has pushed every SMB into the online channel. Those 40% of SMBs that only had physical locations before, are now forced to open up online stores in order to move products. When they did that in March and April, most of them chose Shopify as their e-commerce solutions provider.
Covid-19 won’t last forever. Eventually, it will pass. Eventually, physical stores will re-open, and consumers will go back to shopping offline. But all of the SMBs that have pivoted onto Shopify’s platform over the past few months, will stay on there, because they will begin to see online retail as a necessary complement to their physical operations.
Covid-19 is the beginning of a multi-year pivot wherein Shopify turns into the e-commerce backbone of every SMB in the world.
Domestically, SMBs making less than $5 million in annual revenue account for about 20% of total retail sales. Shopify’s U.S. e-commerce market share is 5.9%. Globally, it’s just 1.7%.
In other words, there’s ample room for Shopify to expand its market share by leaps and bounds over the next several years, and sustain huge volume, revenue, and profit growth.
$1,000+ Prices Coming Soon
I’ve forever been a huge bull on SHOP stock. Yet the first quarter earnings report was so good that it has forced even me to revise my long-term growth estimates higher on Shopify.
Most importantly, I’ve revised my 2030 global e-commerce market share estimate for Shopify up to 10%, from a previous 7.5%, because the company’s March and April growth velocity imply that SMBs pivoting towards e-commerce are overwhelmingly choosing Shopify and not another competitor to do so.
Concurrently, I’ve revised my active merchant accounts estimates higher, too. Operating margin estimates have moved slightly higher, too, to account for bigger scale driving more positive operating leverage.
All in all, I now see Shopify’s 2030 earnings per share coming in around $50, from a prior $35 estimate. Based on a 35-times forward earnings multiple, which is about average for application software stocks, that implies a 2029 price target for SHOP stock of $1,750. Discounted back by 10% per year, that equates to a 2020 price target for SHOP stock of roughly $750.
The Bottom Line on SHOP Stock
Shopify is the backbone of SMB e-commerce, and Covid-19 has sparked a seminal moment in SMBs towards more widely and robustly adopting e-commerce.
As such, the next few years will be defined by:
SMBs more aggressively building out online selling channels.
Those SMBs partnering with Shopify to help them do just that.
Shopify’s presence in the global retail market growing significantly, which will power sustained huge revenue and profit growth for the company.
That sustained big growth lays the foundation for SHOP stock to zoom past $1,000 within the next few years.
That doesn’t mean you have to chase this red-hot rally. But it does mean you should buy any and all dips in this strong growth stock with both hands.