Where Will Shopify Be in 5 Years?
The e-commerce services provider faces slower growth and rising expenses as hungry rivals loom on the horizon.
Shopify (NYSE: SHOP) had gone public at $17 per share nearly five years ago. Today, stock trades at about $520 a share by the e-commerce service provider, and initial investors are now sitting on a 30-bagger return. Shopify stunning investors with their strong revenue growth, steadily rising by high double digits, and merchants, rising from 162,261 in early 2015 to over one million in 2019. The bears, who warned that Shopify was not consistently profitable and that its stock was trading at frothy valuations, have been proved repeatedly wrong. But can the growth streak of Shopify continue in the next 5 years? Let's look at this one. What happened to Shopify over the past five years?
Shopify offers a wide range of e-commerce tools to help merchants digitize their offline businesses— including digital storefronts, marketing tools, payment tools, and other services. It divides its business into two main segments: merchant solutions, which generate revenue for online orders mainly from payment and transaction fees; and subscription solutions, which generate recurring revenue from its core platform and add-on services.
During the past five years, demand for Shopify's services has surged as small and medium-sized merchants scrambled aboard the e-commerce bandwagon. As a result, its revenue almost doubled in 2015 and 2016 but decelerated gradually over the past three years.
What will happen to Shopify over the next five years?
Shopify's stock trades at over 650 times forward earnings and nearly 30 times this year's sales. Those nosebleed valuations are much higher than its projected growth rates, and the company could struggle to justify that valuation as its business matures. Over the next five years, Shopify will face tougher competition from Adobe (NASDAQ:ADBE), Square (NYSE:SQ), Microsoft (NASDAQ:MSFT), and other expanding companies. In 2018 Adobe acquired rival Magento from Shopify and tied the platform to their cloud services. Square bought Weebly, which designs websites and online stores and that same year integrated their services into their digital payment ecosystem. Microsoft suggested last year that, in the near future, it could bundle Shopify-like e-commerce services into its cloud services.
Shopify has the advantage of a first mover in this market, but its slowing growth in revenue and rising expenses suggest it could struggle to keep pace with those rivals. In 2018, Shopify began expanding overseas to offset its slowdown in the United States and Canada, but it could face an uphill battle if Adobe and Microsoft bundle Shopify-like features into their cloud services. As a result, investors should expect Shopify to expand its ecosystem -- which already includes an internal app store, point-of-sale card readers, a wholesale channel for buyers, bulk label printing services, AR features for mobile apps, and cash advances via Shopify Capital -- to lock in merchants and boost its subscription revenue.
Shopify vs. fundamental gravity.
In a defensible niche, Shopify runs a great business model but there is too much irrational exuberance baked into the stock. Investors should not expect Shopify in the next five years to replicate its post-IPO returns again. In a best-case scenario, the stock should level out to more reasonable levels as its valuations cool. Shopify could lose ground to rivals like Adobe, Microsoft, and Square in a worst-case scenario— and his stock could lose its luster and plummet.