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Shopify Has Tremendous Growth Potential

Published 10/23/2021, 08:18 AM
Updated 07/09/2023, 06:31 AM

Shopify (NYSE:SHOP), the retail distribution giant, has created substantial value to its shareholders in the past years.

The company returned 3400% to stockholders in less than six years and has a competitive advantage and the space to keep growing in the next decade. 

If entrepreneurs and small businesses want to operate online, Shopify will help them develop and scale up to any targeted size, with almost no upfront investment. 

The company offers merchants tools to cover all of their backend needs (marketing and communication, logistics, payments).

It has created partnerships with companies like Facebook (NASDAQ:FB), Instagram, Pinterest (NYSE:PINS), Amazon (NASDAQ:AMZN), Etsy (NASDAQ:ETSY), allowing users to launch communication campaigns on social media and marketplaces. 

Since its 2015 IPO, the customer base has multiplied by more than 10. As of July 2021, 1.7 million customers were using Shopify. 

That number should continue to rise as e-commerce resumes its development and merchants realize the advantages of using Shopify.

The company was successful in serving major multinational companies such as Nestle, Diageo (LON:DGE), Kraft Heinz (NASDAQ:KHC), and Staples.

Before its 2015 IPO, management put its total addressable market (TAM) at $10 billion. The sector has witnessed a robust CAGR since, and today the TAM is considered to be around $72 billion for small and medium enterprises alone. 

With revenue of a little less than $3 billion in 2020, Shopify has captured only a tiny fraction of this vast market. In 2015, Shopify's revenue was only $200 million. This represents a CAGR of more than 70% per year for six years.

In 2020 alone, COVID lockdown sent Shopify's sales rising 86% year over year. Entrepreneurs and companies needed to survive during the lockdowns, explaining the surge in sales.

Impressive Numbers in 2021 So Far

In the first quarter, revenue jumped 110% to reach $1 billion. Meanwhile, the second quarter revenue was $1.12 billion, up 57% year over year and 12% quarter over quarter.

Competitive Threats

The merger between PayPal (NASDAQ:PYPL) and Pinterest could represent a competitive threat to Shopify.

However, we believe that Shopify's capabilities in terms of infrastructure and the success the company has been having in retaining its customers should pose an obstacle to the potentially newly formed competitor.

Fundamental Highlights

  • Revenue is forecast to rise by 28.5% until 2024.
  • Free Cash Flow is expected to climb 49.5% per year for the next five years.
  • The customer retention rate averaged 130% in the last few quarters.
  • In the past six years, the company never missed analysts' revenue forecasts and exceeded analysts' EPS expectations by 421% on average each quarter.
  • Net income increased 82.5% per year past four years.
  • Cash from operations climbed 392% per year in the past four years.
  • As of July 2021, the debt to equity ratio was 8.99%.

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