This Stock Has Huge Upside Potential

E-commerce solutions provider Shopify (NYSE:SHOP) reported fourth-quarter numbers in mid-February. The numbers were stellar: revenues breezed past expectations and basically doubled year-over-year; earnings flew past expectations, too, powered by operating margins that essentially quadrupled from the year ago quarter.

Yet, despite the awesome numbers, SHOP stock plunged by almost 10% after the print.

Why? Two big reasons.

One, Shopify management warned that 2021 growth rates will slow relative to 2020 as broader distribution of Covid-19 vaccines shifts consumer spending back into the physical retail and entertainment channels.

Two, a blockbuster retail sales report put continued upward pressure on fixed income yields and interest rates, which puts continued downward pressure on growth stock valuations.

Both of these concerns are ephemeral and overblown. So buy the dip in SHOP stock. This is still a great long-term winner.

Shopify’s Strong Earnings

Ever since the Covid-19 pandemic shut down the world back in March, Shopify has sprinted into hypergrowth mode as both retail sellers and buyers have migrated rapidly into the online channel.

Shopify’s fourth-quarter numbers proved that this hypergrowth trend continued in the last three months of 2020.

The company’s gross merchandise value rose 99% year-over-year in Q4. That’s largely consistent with the triple-digit GMV growth rates Shopify has been reporting ever since March. Meanwhile, revenues rose 94% year-over-year — also consistent with the 90%-plus revenue growth rates Shopify reported in Q2 and Q3.

Concurrently, big revenue growth continued to drive significant positive operating leverage throughout Shopify’s highly scalable, software-centric business model with lots of fixed costs and small variable costs. Operating margins in Q4 clocked in at 20%, up almost 4X year-over-year.

Overall, the print was very solid, and comprised sustained huge revenue growth and sustained huge profit margin expansion.

Why, then, did Shopify’s stock drop in response?

Two perceived headwinds — neither of which have staying power.

2021 Headwinds are Overstated

Shopify stock fell after blockbuster Q4 numbers because investors were ostensibly concerned by two headwinds.

First, a slowdown in 2021. Management outright said in the Q4 press release that 2021 growth rates will be slower than 2020 growth rates. Of course that will happen. Covid-19 is not a long-term situation. Vaccines are here. They are being administered. Retail shops, restaurants, and entertainment venues are reopening. Consumer spending will shift back into the physical channel.

That’s obvious. But what’s less obvious — and more profound — is that a huge portion of spend will remain in the digital channel even as physical stores reopen. That’s because consumers discovered the ubiquitous and unrivaled hyper-convenience of e-commerce in 2021, and won’t be giving that up anytime soon. So, yes, we will all go back to shopping in-stores… but we will simultaneously be shopping online more than ever before, too.

Thus, Shopify’s growth rates in 2021 will be slower than in 2020, but should also remain elevated relative to pre-2020 levels. That’s bullish for SHOP. Slowdown concerns are overstated.

Second, investors are worried about rising rates putting pressure on growth stock valuations. That’s a very reasonable concern. I’m watching yields closely, too. But if you look back to the 1980s, the spread between the 10-Year Treasury yield and trailing twelve month earnings yield on the S&P 500 has been about 1% — and at the current earnings yield (3.5%), you’d need the 10-Year yield to rise to 2.5% to provide what history would deem real “pressure” on equity valuations.

That won’t happen anytime soon with secular deflationary forces of automation and globalization at work. Thus, rising rates are a near-term and overstated concern, too.

The implication? Buy the dip in Shopify.

Huge Long-Term Potential

Zooming out and looking at the big-picture fundamentals, Shopify has huge potential over the next ten years — and management is doing everything right today to fulfill that potential.

The company is building out its fulfillment network and more seamlessly integrating fulfillment software into its seller technology stack, so that delivery becomes hyper-cheap and hyper-easy for anyone selling through Shopify. That will attract more sellers to the Shopify platform.

On the buyer side, Shopify is committing resources to fleshing out its newly launched Shop App — which, at scale, could turn into a digital shopping marketplace for buyers looking to discover new brands and products that have Shopify stores. An Amazon marketplace, for Shopify, if you will. That will increase the number of buyers that shop through Shopify stores.

Shopify is also expanding internationally, and is working diligently to improve non-English versions of its platform. That will provide a big growth boost for Shopify in non-English-speaking markets — which is most of the world.

And, perhaps most exciting, Shopify is building out its POS solution. Think physical card readers, like Square’s payment readers, which automatically connect with your online store. Shopify has a huge opportunity to be a big player in brick-and-mortar, too — and that could significantly lengthen the company’s growth runway.

All in all, the fundamentals here are very promising. SHOP has huge upside potential over the next several years.

Bottom Line on Shopify Stock

Shopify stock is one of the market’s best long-term growth investments.

The company’s fourth-quarter earnings report simply confirmed this reality.

So ignore the ephemeral noise, and buy (and hold) SHOP for the long haul.

— Luke Lango

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Source: Investor Place