If you’re right on both counts – i.e. the business continues to execute and the megatrend shows expected or above-average growth – then the likelihood of making money on your investment, over the long term, is high.
One such company that has been an exceptional example of this has been Shopify Inc (NYSE: SHOP), the e-commerce digital storefront and software provider.
Since going public in the first half of 2015 at US$17 per share, Shopify shares have gained by roughly 8,900%.
Yet even after these mind-boggling gains, the company still has a long growth runway in front of it. Here are three charts that show investors why Shopify remains a buy for the long term.
1. Low e-commerce penetration
While the Covid-19 pandemic has – understandably – supercharged demand for e-commerce globally, investors might be surprised to find out that in the US, e-commerce sales still only accounted for just 14% of overall retail sales in 2020 (see below).
If we compare that to China – one of the leading global economies where e-commerce penetration is already high at 44.8% in 2020 – then we can see that US e-commerce still has huge runway for growth.
That’s good news for Shopify since the majority of its business comes from North America, and primarily the US.
While the growth rate of e-commerce sales in the US may slow in the years ahead, the fact that it’s expected to make up just a quarter of overall sales by 2025 means there is room for the sector to surprise to the upside.
2. Winner of direct-to-consumer
While the growth of the broader e-commerce sector in the US is still promising, it’s even more exciting for Shopify investors that the company’s share of US online retail sales is still far behind the leader Amazon.com Inc (NASDAQ: AMZN).
As you can see from the chart below, as a share of e-commerce sales in the US last year, Shopify’s market share was below 10% – based on the total gross merchandise value (GMV) that flowed through Shopify’s platform in 2020.
Even then, its share still came ahead of other retailing giants such as Walmart Inc (NYSE: WMT) and Home Depot Inc (NYSE: HD).
That means it must be doing something right. And that something is providing a direct-to-consumer (DTC) platform for merchants so that they have 100% control over their brand, something that Amazon’s third-party marketplace can never offer.
For all Software-as-a-Service (SaaS) platforms, the recurring revenue that the companies generate provides a visible stream of future income for investors.
Shopify also has this via its massive merchant base of over 1.7 million, all of which pay some sort of monthly platform fee that can be adjusted according to their needs.
The end result? A monthly recurring revenue (MRR) stream that has expanded at a compound annual growth rate (CAGR) of 43% over the past five years to US$98.8 million in its latest quarter (see below).
The Covid-19 pandemic provided a bump for Shopify’s MRR as more merchants joined the platform. In the years ahead, this is set to only grow as these new merchants realise the value of Shopify’s platform and gradually increase their spend.
Source: Shopify Q3 2021 earnings presentation
Investing in a flywheel of success
For Shopify, one of the main reasons for its success has been the ability of the company to create what it calls a “Shopify Flywheel” where the more merchants join the platform, the more channels and capabilities it has and the more GMV flows through its platform.
All these work in tandem to ensure that Shopify is the leading e-commerce platform for merchants who are increasingly going the direct-to-consumer route.
Long-term investors should remember that in stock investing, it tends to ring true that “winners win”. Over the past five years or so, Shopify has been one of the biggest winners in the e-commerce space.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Shopify Inc and Home Depot Inc.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.