Don’t forget about this e-commerce darling
Jamie Louko (Shopify): Shopify enacted a 10-for-one stock split in late June, but the company didn’t see the short-term pop in its shares price as most companies that recently split their stock have. While a stock split doesn’t fundamentally change the business -- it only makes shares cheaper by turning one share into 10 for all investors -- investors have gotten excited about stock splits this year. Shopify seemed to be left out of that, but here’s why this stock shouldn’t be forgotten.
Part of the reason shares didn’t see that boost after splitting its stock is that shares have been on the decline in recent months. Year to date, Shopify stock is down more than 77% as it has struggled with a looming recession and rising inflation. These challenging macroeconomic factors are impacting Shopify, as consumers are less willing to buy discretionary e-commerce items during times of uncertainty. The company enables millions of e-commerce businesses to sell online, so less activity for its merchants results in less revenue for Shopify.
That said, Shopify certainly has the potential to win over the long term. Shopify’s solutions have seen steady adoption. Even during this difficult environment, Shopify saw e-commerce and point-of-sale gross merchandise volume growth that outpaced the broader industry in the U.S. in Q2 2022, signaling that it is taking market share.
Shopify also has one key advantage: It’s switching costs. Not only is Shopify a leading platform for e-commerce businesses, but it also provides hardware products to help in-store sales. Additionally, Shopify merchants have access to a payment processing system, short-term capital loans, and even a logistics network providing fast, reliable delivery for both Shopify’s merchants and their customers. Therefore, once a merchant gets engrained into the Shopify ecosystem and begins to add more products, it can be hard to shift to a different platform. This could allow it to hold onto its customer base during its downturn, while rivals might lose customers, and thus, market share.
With shares getting beaten down despite this continued performance, the company trades at 8 times sales. While that is more expensive than other rivals like BigCommerce (BIGC 4.25%)-- which currently trades at 4.6 times sales -- this is the cheapest valuation Shopify has seen in a while and is much more reasonable than past valuations. Therefore, now might be the time to add shares of this e-commerce leader to your portfolio for the long haul.
