3 Things About Shopify Stock That Smart Investors Know

Shopify (STORE -6.26%) it’s down more than 75% in 2022 alone, as the company has felt the slowdown in e-commerce spending. The company invested as if the boost in 2020 e-commerce activity was permanent, but as Shopify has seen, it’s back to normal growth.

Many investors think this is a screaming buy, and while stocks are cheap, there are some risks that savvy investors have recognized. These risks could severely hamper Shopify’s long-term growth prospects. That said, savvy investors know that if this e-commerce stock can overcome these challenges, there’s a new opportunity waiting for it.

Image source: Getty Images.

1. Amazon is a big concern

Really. Amazon (AMZN -2.18%) it is the largest e-commerce player in the US, making it a formidable rival. Shopify estimated that in 2021, Amazon handled 41% of US ecommerce retail sales, versus Shopify’s 10% share. However, Amazon brings another risk to the table besides its scale. That risk is “Buy with Prime.”

Recently, Amazon announced that Shopify merchants would be able to use their Buy with Prime button. This button allows Amazon Prime members shopping on Shopify-powered platforms to easily purchase products. It competes directly with Shopify’s payment service, Shop Pay. One of the biggest revenue drivers for Shopify’s commerce solutions, accounting for nearly 72% of Shopify’s $1.3 billion in revenue in Q2, is its payment processing fees. Therefore, this new integration could hurt Shopify’s processing volume and thus overall revenue if it catches on.

Management has made it clear that it sees this as a risk. The company recently warned merchants about installing Buy with Prime, saying it violates its terms of service. Also, it is rumored that Shopify will not protect merchants using Buy with Prime from fraudulent transactions. It’s safe to say that Shopify is concerned about this move by Amazon and is taking steps to prevent its merchants from using it.

2. Compliance is risky

Shopify has been investing heavily in expanding its fulfillment capabilities. In addition to its acquisition of 6 River Systems a few years ago, it acquired Deliverr, a fulfillment company, earlier this year for $2.1 billion. Deliverr will drive the development of the Shopify Fulfillment Network (SFN), which, in theory, will be an end-to-end fulfillment network to help small Shopify merchants deliver fast and reliable deliveries to customers.

If this is successful, the SFN could be a central selling point. One of the difficulties for small eCommerce businesses is keeping up with fast shipping from giants like Amazon. However, the SFN will give millions of Shopify merchants the scale and infrastructure to quickly deliver products. Shopify even has Shop Promise, which provides reliable two-day delivery. Not only will this be a selling point and a reason why a merchant might choose Shopify over other rivals like big tradebut it will also likely be a substantial revenue generator for the company.

Shopify bets on your SFN, and that’s a risk too. If the company can’t scale it effectively and get it adopted at scale, Shopify would lose a lot of money. The company predicts that it will spend $1 billion in capital expenditures (capex) for the SFN over the next several years. For comparison, Shopify alone is projected to spend $200 million on capital expenditures in 2022. So shareholders need these investments to pay off.

3. The tailwinds are in Shopify’s favor

If Shopify can overcome these two potential risks, there is a new opportunity ahead. Global retail e-commerce is expected to account for 22% of total retail sales in 2024. That’s up from 18% in 2020. It’s not far-fetched to think that this trend could continue beyond 2024. It’s clear that the winds are turning. they move in favor of Shopify, and Shopify likely has room to capitalize on it if it remains one of the leaders in the space.

Also, today’s prices look attractive. Shopify is currently trading at 8.5x sales, nearly its lowest valuation since it went public in 2015. It’s closer to its all-time low than its all-time average at this multiple.

Investing in Shopify could be a good idea given the advantage for investors with a diversified portfolio who can handle additional risks. That said, these concerns are more important than many investors might think. This is not the time to sell Shopify stock (I certainly am not), but it may not be the right time to do it all either. Rather, adding a small amount or just holding your position might be the best move.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. jamie louko has positions on Amazon and Shopify. The Motley Fool has standings and recommends Amazon, BigCommerce Holdings, Inc., and Shopify. The Motley Fool recommends the following options: $1,140 January 2023 Long Calls on Shopify and $1,160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.

Leave a Comment