Is Shopify's (SHOP) Place in Your Portfolio Justified?

Shopify Inc. SHOP has been a favorite with investors, courtesy of its rising share price and strong fundamentals. Shares of Shopifyhave gained 144.6% year to date, significantly outperforming the industry’s 26.3% rally.

Let’s now delve deeper and take a look at some of the aspects aiding the company’s performance.

Key Drivers

According to National Retail Federation (“NRF”) online retail sales will grow 8–12%, three times faster as compared with brick-and-mortar retail sales growth projection of 2.8% in 2017. Market research firm eMarketer estimates global retail eCommerce sales (excluding travel, restaurant and event ticket sales) to reach $1.915 trillion in 2016, accounting for 8.7% of total retail spending worldwide. This will further increase to $4.058 trillion by 2020, which will make up 14.6% of total retail spending. We believe that the massive growth in eCommerce spending bodes well for Shopify.

The company’s cloud-based platform is well-positioned to address growing needs of merchants at a time when social media, cloud computing, mobile devices and data analytics are transforming the eCommerce market place.

Shopify’s biggest USP lies in the fact that it is a brand oriented platform as compared with an online marketplace. Here, the brand hogs the limelight, which helps the merchant win customers much faster through focused interaction. The platform helps in improving customer’s brand loyalty, which drives merchant revenues. Further, we note that Shopify hosts a huge database of merchant and customer interactions. Merchants leverage this transactional dataset to get meaningful insight into the sales channel growth prospects and consumer behavioural aspects. This improves their ability to target prospective customers more easily, which drives sales growth.

We believe that the company’s merchant focus strategy will aid it to dominate the SMB eCommerce market in the long run.

Notably, more than 133K net new merchants began selling on Shopify during 2016. We anticipate this number to improve as newly added sales channels like Facebook Messenger and Amazon continues to attract new merchants. Shopify noted that the addition of Houzz, Wanelo, eBates and others has driven the number of channels over which a merchant can sell to more than a dozen. The company also noted that merchants are buying more apps through app store, which is positive. Shopify app store currently offers more than 1400 apps. Moreover, availability of Apple Pay and addition of Canada Post are some other notable developments that will boost merchant base.

We believe that the company’s strong partner referral system will boost merchant base that will eventually drive top-line growth in the near term.

Shopify has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, recording a positive average earnings surprise of 166.5%.

Further, it has a long-term expected EPS growth rate of 22%.

Risk Remains

Shopify is relatively a new player in the eCommerce marketplace. Although it is not a direct competitor to behemoths like Alibaba and Amazon, many of its customers are. Moreover, the company focuses on the SMB segment which is more susceptible to macro-economic headwinds. Both factors present significant risk for growth prospects.

Zacks Rank and Key Picks

Shopifycurrently carries a Zacks Rank #3 (Hold).

Few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA, DXC Technology Company DXC and Micron Technology, Inc. MU, all of which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA, DXC and Micron have long-term earnings per share growth rate of 10.3%, 10.5% and 10%, respectively.

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Shopify Inc. (SHOP) : Free Stock Analysis Report
 
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