We came across a bullish thesis on Shopify Inc. (SHOP) on Substack by Business Invest. In this article, we will summarize the bulls’ thesis on SHOP. Shopify Inc. (SHOP)’s share was trading at $106.96 as of Nov 22nd. SHOP’s trailing and forward P/E were 99.96 and 73.53 respectively according to Yahoo Finance.
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Shopify has long been regarded as a leading player in the e-commerce space, demonstrating several qualities that indicate its potential as a high-quality, long-term investment. Founder-led by Tobias Lütke, who remains the visionary CEO, the company has shown a commitment to innovation through its substantial investment in research and development, consistently dedicating 17%-22% of its net revenues to R&D. Shopify’s business model focuses on diversifying its revenue streams, with notable growth in its B2B segment. Furthermore, the company has strong shareholder alignment, with insiders holding 6-7% of total shares. Shopify’s free cash flow generation consistently exceeds its net income, signaling a solid future earnings power. The company has also demonstrated impressive market share growth, boasting a 26% three-year revenue compound annual growth rate (CAGR), which highlights its competitive strength and ability to outpace competitors. Shopify’s customer-oriented approach is reflected in high retention rates and strong customer satisfaction metrics, such as a high Net Promoter Score (NPS), which contributes to its enduring brand loyalty.
However, the company’s stock took a significant hit in 2022, with a dramatic -80% decline from its highs during the market’s bubble burst. Despite the valuation reset, Shopify has experienced a gradual but steady uptrend over the past two years, supported by improvements in key strategic metrics. The company’s attach rate, which refers to the revenue Shopify keeps for every dollar generated on its e-commerce platforms, has been trending upward. This increase can largely be attributed to Shopify’s offer diversification, particularly the growth of its Shopify Plus and B2B offerings, which have outpaced the expansion of its lower-margin payments segment. The company also maintains significant pricing power, with its take rate still lower than that of competitors like Amazon’s third-party marketplace, suggesting that Shopify could continue to increase its prices without facing significant customer churn or demand loss.
Gross margins, a key indicator of pricing power, had dipped for a couple of years but rebounded strongly after Shopify sold off the majority of its logistics business to Flexport in early 2023. The divestiture of the logistics segment allowed Shopify to scale down and refocus its operations, leading to a recovery in gross margin to over 50%, which, in turn, boosted profitability and improved bottom-line results. This move also had a positive effect on Shopify’s free cash flow, which had bottomed out in late 2022 but began to recover as a result of the divestiture. The free cash flow margin has been steadily rising, nearing 20%, which signals strong earnings potential going forward.
In light of these positive trends, the investment case for Shopify appears increasingly compelling. To assess the risk-reward profile, the company’s business case was analyzed through three scenarios: bear, base, and bull. The bear case assumes that revenue growth would align with the industry’s overall growth at 11% per year, with no improvement in Shopify’s attach rate or gross margin. In this scenario, the stock could drop to $40 per share, a -29% downside. The base case, which assumes revenue growth of 17% per year, an increase in attach rate to 3.55%, and a moderate improvement in gross margins to 54.6%, suggests a target price of $89 per share, offering a 61% upside. The bull case, with revenue growth outpacing the industry at 19% per year, a further increase in attach rate to 3.7%, and a gross margin of 56.1%, indicates that the stock could reach $157 per share, representing a 175% upside.
Given these projections, Shopify’s current stock price, which was trading around $56 at the time of the analysis, presents an attractive entry point with a favorable risk-reward profile. Despite the downside risk not being entirely mitigated, the upside potential makes it a strong investment opportunity. Shopify’s solid fundamentals, including its founder-led management, strategic investments in R&D, expanding revenue streams, high customer retention, and improving profitability metrics, make it a compelling choice for long-term investors. Furthermore, the market’s undervaluation of the stock after the 2022 crash presents an opportunity to enter the stock at a discounted price, with the potential for significant upside as the company continues to capitalize on its strengths in e-commerce innovation and operational efficiency.
Shopify Inc. (SHOP) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 56 hedge fund portfolios held SHOP at the end of the third quarter which was 56 in the previous quarter. While we acknowledge the risk and potential of SHOP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SHOP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.