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Once an investor favorite, e-commerce specialist Shopify (SHOP -1.11%) hasn’t been in the best shape over the past 12 months, even by comparison with the struggling stock market. What happened to the company? Shopify was up against a combination of headwinds this year. There was a slowdown in the e-commerce sector compared to the worst of the pandemic.
That’s not to mention economic factors such as inflation, supply chain issues, and interest rate increases that affected Shopify’s performance. Despite these roadblocks, I remain an unabashed Shopify bull. In fact, I believe the company has what it takes to triple by 2030 — which would amount to a compound annual growth rate (CAGR) of about 17%.
Let’s consider why.
Shopify helps merchants build online storefronts and provides them with everything they need to run their online operations.
That means the company’s future is largely tied to the growth of the e-commerce sector. And that’s great news. Online shopping seems ubiquitous nowadays. It is convenient for consumers, who can visit multiple stores with the click of a few buttons and have orders at their doorsteps relatively quickly, often without lifting a finger.
E-commerce is also convenient for businesses. Instead of only catering to customers within a relatively small geographical area, retailers can attract potential clients who aren’t close to a single physical store. Various shipping options even make it possible to do business across borders.
All these advantages will continue to spearhead the growth of e-commerce, which has yet to take over completely. The sector accounted for 18.8% of total retail transactions worldwide in 2021, with some estimates predicting that this number will jump to 24% by 2026. That will only benefit companies like Shopify.
Consider the company’s top-line growth over time. In the third quarter, Shopify’s revenue increased by 22% year over year to $1.4 billion. That’s a lower top-line growth rate than what we’re used to with Shopify, but the company’s revenue has expanded at a CAGR of 52% over the past three years. Shopify’s challenging year-over-year comparisons partly explain its poor relative performance over the past 12 months.
SHOP Revenue (Quarterly YoY Growth) data by YCharts
But the general increase in online retail transactions, coupled with Shopify’s solid track record when zooming out, suggests plenty of untapped potential. And there is even more to like about Shopify’s business, namely the company’s competitive advantage.
The booming online commerce opportunity means plenty of players will seek to make a dent in this space. Shopify will have to build a competitive edge to carve out a niche. Thankfully, the company has done that thanks to its software-as-a-service (SaaS) model. Like many other SaaS companies, Shopify benefits from high switching costs, which helps the company retain most of its customers.
The higher the cost of switching to a competitor, the less likely clients will jump ship. What could merchants on the platform lose by opting for one of Shopify’s competitors? Building an online storefront takes time and money. The longer it is around, the more likely it is that there is a brand associated with it and with which loyal customers identify. Giving all that up means losing the time, money, and, potentially, the brand the merchant has built. That’s not an insignificant price to pay.
Shopify’s high switching costs are integral to the company’s long-term prospects.
There is no question that Shopify is going through difficult times marked by challenging economic conditions and unfavorable year-over-year comparisons. But neither of these things will last forever. Eventually, the economy will bounce back, inflation will cool, and spending will increase. That will benefit online merchants and those companies, like Shopify, that provide retailers with an e-commerce platform to reach customers.
Meanwhile, the comparisons with Shopify’s business at the pandemic’s peak will eventually fade, leading to stronger revenue growth and better stock market performances. Seven years is plenty of time for Shopify to recover from its recent woes and return to its pre-COVID habits of crushing the market. In my view, achieving a CAGR of 17% through 2030 is more than doable for the company.
Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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