Shopify (TSX:SHOP) has been on a great run ever since its initial public offering (IPO) in 2015. Since that time, it has risen about 2,300% in the markets — much better than the TSX index as a whole. If you’d invested $10,000 in SHOP at its IPO date and held to today, your position would be worth roughly $240,000. That’s quite the return!
However, Shopify has actually been performing poorly over a two-year period. Despite a major rally this year, it’s still down from its 2021 high of $214. In fact, it’s down by 60%! So despite some recent gains, Shopify stock is far from its glory days when it reliably went up 100% year in and year out. In this article, I’ll explore where Shopify stock stands today, and whether it can again become the “millionaire maker” it once was.
Competitive advantages
To begin with, we can look at Shopify’s competitive position. Specifically, at the advantages that it has over its competitors. All of a company’s future revenues, earnings and cash flows ultimately come from its relationships with its customers. The fewer competitors a company has, the more bargaining power it has, and the higher the prices it can charge. Therefore, companies that grow and have high profit margins in the long term tend to have advantages over their competition.
Does Shopify have any such advantages?
First of all, it is the biggest e-commerce shopping cart company by far. The alternatives, like Ecwid and WooCommerce, are far behind it.
Second, Shopify has a lot of celebrities using its platform. Jeffree Star, Justin Bieber, and Adele have all been known to host their online stores on Shopify. These big stars often do millions per year in merchandise sales, so signing up just one of them can make a big difference to Shopify’s business.
Third and finally, Shopify charges lower fees than Amazon does. Amazon’s fees can go as high as 40% for some product categories; Shopify’s are merely a few cents per sale plus a small percentage cut. So, SHOP has the cost advantage. However, Amazon has a website that can drive traffic to business’s product pages, and a fulfillment network. Shopify lacks these advantages.
Growth
Next up, we have growth. Like many tech companies, Shopify scores well on this metric. In the most recent quarter, it grew its revenue at 25%. It also had its free cash flow swing from a loss to a positive figure. In the five years after it went public, SHOP’s revenue grew at about 50% per year on average. So, this is undeniably a high-growth name.
Profitability
Now, we get to the weakest part of the analysis for Shopify: profitability.
SHOP only had two profitable years in the last eight: 2020 and 2021. The company lost its profitability during the 2022 tech bear market because its stock portfolio declined in value and because it had over-hired in the preceding “good years.” It was a tough time for Shopify, and in 2022, the company was not profitable. However, last quarter, it eked out $0.05 in diluted earnings per share and positive free cash flow. Potentially, then, we could see Shopify close out 2023 being profitable on a full-year basis.
So, we’ll conclude with the question we started the article with: Can Shopify help you retire a millionaire?
These things are always unclear, but my best guess is that Shopify’s days of turning ordinary people into millionaires are behind it. It does not have the growth it once had and isn’t consistently profitable. It may do well from here, but a 2,300% return is unlikely.
