During the global pandemic, Canada saw the rise of a standout performer that prevented the TSX from registering a negative return in 2020. Shopify (TSX:SHOP), a key global e-commerce platform provider, played a pivotal role in enabling merchants to thrive despite the stringent lockdowns and social distancing measures.
Today, the tech giant has seen its valuation come down considerably from its previous peak. That said, there are a number of investors who believe this growth stock could be poised for much greater upside over the long term.
Let's dive into three reasons why this may be the case.
1. Merchant-friendly business model
Many e-commerce platform providers gauge their customer bases over time – via exorbitant fees and/or a model that scales in terms of the cost businesses face to operate an increasingly successful online store. While other companies essentially tax small and medium-sized businesses for doing well.
Shopify's model competes with other major e-commerce platform providers (such as Amazon) by providing impressive back-end flexibility and capabilities, while charging relatively low fees on the first $1 million in sales made by a respective business. Essentially, as the companies in its network do better, Shopify does better. This sort of model encourages greater adoption of its services and creates long-standing network effects (companies are less likely to switch their platform provider once they're within the Shopify ecosystem).
2. Strong expected growth
Having the true engine of economic growth (small and medium-sized businesses) power Shopify's core business model, there's a lot to like about the company's long-term growth prospects. Current estimates peg the number of e-commerce companies using Shopify at between 2 and 4 million stores, serving millions of customers daily. As more and more SMBs sign on for Shopify's services in a bid to bolster their physical presences, or simply go direct to consumer via an online model, Shopify stands to benefit.
Importantly, the broader macro data support the idea that shoppers are increasingly switching to an online-first model. Shopify facilitated $67.2 billion in gross merchandise value (GMV) this past quarter, bringing in $2 billion in revenue on this amount (good for an average fee of less than 3%). In other words, as the company's customer and GMV base grows, its revenue and earnings should grow in a similar fashion over the long term.
3. Network effects
With most Shopify users seeing strong growth, the network effects the Shopify ecosystem provides (via a range of integrated applications and services) means that existing customers are less likely to switch to another platform on short notice, enabling Shopify to potentially raise prices in the future if needed.
For now, the company appears to still be in growth mode, focusing on emphasizing its competitive advantages to new potential customers and enhancing its network effects. I think this strategy will pay off long term, and investors have already reaped the benefits of this growth strategy to a large degree. Any investor that's been in Shopify stock for more than five years will note how powerful of a growth engine the company's core business has been.
Assuming this remains the case long term, this is a stock that's certainly worth considering at current levels.
