Is Shopify stock a buy?

Hello and welcome to this episode of the master class hosted by Xillion. I'm your host, Gagan Sandhu. A little bit about Xillion: we are a platform that helps you improve your financial status, build wealth, and become financially independent within 10 years or less. As for me, I’m Gagan Sandhu, the founder and CEO of Xillion. To give you some background on why I'm discussing finance with you, I have been investing for about 20 years and have consistently achieved better than S&P 500 returns. Additionally, I hold two engineering degrees and a business education from the University of Chicago.

Every week, on Tuesday and Thursday, I bring to you one financial concept or details of a company that may not be widely known but should be considered for your portfolio. Without further ado, let’s jump right in. Today, we are going to discuss Shopify.

This is our Xillion platform, and everything we will discuss today can be found on Xillion. We have multiple products to help you improve your 401K, invest better, manage your debt and expenses, figure out portfolios, and more. Today, go to Xillion and then to the product called Analyze, and search for Shopify. Boom, this is what we can follow.

Before we jump into the specifics and the numbers, let’s take a look at what Shopify is. This is their website. Shopify is an e-commerce platform for mom-and-pop stores, and it has grown to become a substantial company. Based in Ottawa, Canada, Shopify has offices all over the world and offers a comprehensive suite of products to manage your small business, especially if you’re selling online.

Shopify is an $80 billion company, which is not small but significantly smaller than the trillion-dollar companies like Apple, Microsoft, and Nvidia. The stock price has recently taken a beating, especially after the last earnings call. Overall, the returns have not been great in the last three months, six months, or even one year. However, Shopify today, at $63, is where it was in April of 2020, despite tremendous revenue growth.

Let’s look into it in more detail. The one-year performance shows minimal change, while the three-year performance reflects the COVID bump and crash. Over five years, Shopify has provided decent returns of around 16%, and over ten years, the returns are about 14.26%. Since going public in 2015, Shopify has delivered good returns.

Looking at the valuation, the price-to-sales ratio is 11, meaning that for every dollar of revenue, the market values Shopify at $11. This is higher than 80% of its peers, making it relatively pricey. However, for high-growth companies, it’s too early to focus on price-to-earnings.

Shopify’s growth over the last five years has been around 48% per year, which is excellent. Recently, the growth has been around 20%, still very healthy. The gross margin is 51%, lower than typical software businesses, likely because of their involvement in logistics and payments. Net margins are low as they reinvest earnings into growing the company, a common strategy for high-growth firms.

Looking at the revenue growth, Shopify’s annual revenue has grown tremendously, with 100% growth in some years. During COVID, revenue growth accelerated significantly, but it has since stabilized at a still healthy 20+%.

Shopify’s product diversity is impressive. They offer a complete suite of products to manage your business, from website creation to payment processing, marketing, and customer engagement tools. They even provide AR features for product visualization and real-time chat capabilities with customers. This comprehensive offering earns Shopify a high product diversity rating.

The pricing model is transparent and straightforward, allowing small business owners to start with minimal cost and scale as they grow. This transparency eliminates the need for complex negotiations, enabling business owners to focus on their core operations.

Now, my favorite part: the leadership of Shopify. Toby Lutke, the founder, started Shopify in 2006 after building an online store to sell snowboards. His firsthand experience as a small business owner and his technical skills as a programmer have been pivotal. Toby’s continued involvement and passion for the company are significant advantages. Harley Finkelstein, the President, has been with Shopify since 2009, initially as a customer. Their deep connection to the product and the customer experience drives continuous innovation and growth.

Based on all this, we are quite bullish on Shopify in the long term. The company has the potential to grow 20+% for the next 15 to 20 years, similar to what Amazon achieved. Great companies with long-term founder involvement tend to grow significantly over time.

This concludes our master class on Shopify. Don’t forget to tune in every Tuesday and Thursday at 3 p.m. for these sessions. Feel free to ask questions here or wherever you’re watching this video. I’m happy to engage and answer your questions. Thank you so much, and I hope to see you again next week or this coming Thursday.