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Shopify (SHOP 5.70%), the all-in-one commerce platform, has performed terribly in 2022, losing 70% year to date. However, investors have reasons to be optimistic. The company released an earnings report on Oct. 27 showing why retailers continue gravitating to it.
Here are two reasons Shopify is the best investment in retail.
Shopify’s business is driven by how successful it is at helping its merchant clients create sales, which today means using a multichannel retailing strategy. Data shows that the more channels a merchant offers shoppers to buy through, its revenue multiplies. For instance, when an online store sells through one additional marketplace, like Amazon, it gains a 38% increase in revenue. Likewise, the merchant sees a 120% revenue boost by having two additional channels.
Brick-and-mortar retailing is a significant sales channel that Shopify opened almost a decade ago by releasing its first point-of-sale (POS) software and payment system in 2013. Later it added a card reader in 2017 and additional first-party retail POS devices in 2019. This sales channel gave Shopify an offline presence long before many of its competitors. Most of its competitors use third-party POS solutions or only moved into physical retailing after e-commerce sales started fading post-pandemic.
Meanwhile, Shopify POS has rapidly become one of the preferred solutions for small and medium-sized businesses (SMB). On its third-quarter 2022 earnings call, Shopify President Harley Finkelstein said that since the beginning of 2021, SMB retailers have driven over half of the adoptions of POS Pro. He added that a third of the adoptions are from established offline retailers entirely new to e-commerce or selling only via POS devices. So, physical retailing brings Shopify an altogether new set of SMB customers.
Shopify is rapidly gaining enterprise customers, too. Several well-known brands adopted its POS Pro solutions during the quarter, driving its offline gross merchandise value (GMV) 35% higher over the previous year’s period, or 41% in constant currency. This growth rate outpaced its third-quarter total GMV, which only grew 11% over the year-ago period, or 15% on a constant-currency basis. Its offline GMV also outpaces the third-quarter U.S. retail growth rate of 9%.
Shopify’s multichannel initiatives are a long-term tailwind for growth. According to eMarketer, multichannel online retailing created $241 billion in sales in 2019, and this retail strategy continues to explode higher post-pandemic. By 2023, eMarketer expects multichannel sales to balloon to $575.62 billion.
Market data company Statista projects that global retail e-commerce sales will grow 42% to $8.1 trillion by 2026. So it was only a matter of time before Shopify focused on grabbing market share internationally.
The company introduced two cross-border solutions for retailers in 2022: Shopify Markets and Shopify Markets Pro. It launched Shopify Markets in the first quarter of 2022. This solution enables merchants to establish and manage a single online storefront in multiple countries and regions. Plus, the platform arms merchants with the necessary tools to scale their retailing business in each location added.
International customers can shop using their local currency, languages, and payment methods, and Shopify will collect any duties and import taxes at checkout.
Shopify Markets Pro, an enhanced version of Shopify Markets, debuted in the U.S. in mid-September 2022 in early access. A merchant that chooses the pro version gains Global-e Online as the merchant of record, the legal entity responsible for maintaining a merchant account and selling goods or services to an end customer. In addition, the merchant of record is responsible for adhering to local laws and regulations, registering for and paying taxes, arranging payments in local currency, and shipping and logistics.
A person without Shopify Markets Pro acts as their merchant of record and must manage the complexities of selling cross-border themselves, which can be difficult, especially when handling multiple countries. Consequently, once Shopify starts ramping up the Pro service, it should bring in a ton of revenue, as the platform simplifies establishing a brand internationally for merchants.
Some investors might consider Shopify’s stock expensive based on its price-to-sales (P/S) ratio of 9.32, which is high compared to many of its peers. For instance, comparable companies BigCommerce and Block sell at P/S ratios of 2.37 and 2, respectively. However, Shopify’s solid third-quarter revenue growth beat analysts’ estimates. Shopify also posted a smaller loss than expected, leading many to believe that the tide has turned and the stock is due to rebound.
If you believe in management’s long-term growth plans of multichannel retailing and cross-border retailing, today’s stock price might look like a bargain five years from now.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Amazon, Block, Inc., Global-e Online Ltd., and Shopify. The Motley Fool has positions in and recommends Amazon, BigCommerce Holdings, Inc., Block, Inc., Global-e Online Ltd., and 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.
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