Shopify Stock: Bull vs. Bear

Globe and Mail

2 days ago

Shopify (NASDAQ: SHOP) has been a massive winner over the last decade, delivering a mind-blowing 3,664% return (as of writing) since going public in 2015.
While long-term investors have benefited enormously from this rise, potential investors wonder if Shopify is a worthy stock to add to their portfolio today.
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This article aims to explore the opportunities and risks associated with owning the stock over the next few years, helping investors make an informed decision.
Bull case:
Shopify has been an unusual company, as it competes against Amazon in the competitive e-commerce industry, yet has remained hugely successful over the last decade -- the secret lies in Shopify's unique business model.
As a start, Shopify is a software-as-a-service company focusing on enabling merchants to sell their products anywhere and everywhere. So the idea is that with the tools that Shopify offers, any seller can quickly set up an online store to sell their products globally, or employ the company's hardware-software solution (such as POS system) to sell in a brick-and-mortar store, or do both concurrently (omnichannel). In other words, Shopify aims to be the preferred partner for merchants, benefiting only when they are successful.
Shopify's fee structure further amplifies its focus on merchant success. With a monthly subscription fee of $29 for its basic plan, a new merchant can open an online store with plenty of softer tools at their disposal to make their first sale. Beyond that, Shopify takes a transaction fee ranging from 0.2% to 2% for each successful sale, aligning its interest with the seller's success.
This win-win arrangement helps explain Shopify's sustainable growth over the years. When merchants become successful using Shopify, new sellers get motivated to start their entrepreneurial journey using Shopify's platform. Besides, successful merchants contribute more revenue to Shopify and are also likely to become loyal customers.
And that brings up another key point to highlight about Shopify, namely its recurring revenue nature. For the year ending Dec. 31, 2024, the tech company had $178 million in monthly recurring revenue, or $2.1 billion annually, from its monthly subscription fees.
This revenue is extremely sticky and likely to continue growing over time. The rest of Shopify's revenue is correlated with its gross merchandise value (GMV), which is also recurring, provided that it continues to help merchants sell more products over time. For perspective, GMV grew by 26% in 2024, demonstrating the company's continued growth momentum.
Shopify's solid business model makes the company extremely attractive to investors, especially considering the vast growth opportunities ahead, both locally (in online and offline retail) and internationally. If the company can remain focused on delighting its users, it is likely to attract and retain more successful sellers over time.
Bear case:
While there is plenty to like about Shopify, investors must also consider the downside risk of owning the stock.
One thing to note is that as Shopify continues to grow in size, it may struggle to sustain its historically high growth rates, even though it is likely to continue growing at respectable rates.
For instance, Shopify experienced explosive growth during the pandemic as online sales penetration skyrocketed. However, that tailwind has faded, creating some challenges for the company during the later-pandemic period. The silver lining is that Shopify has expanded beyond its online roots to offer omnichannel solutions for merchants, allowing it to continue growing its total retail market share through its brick-and-mortar solutions.
Besides, as Shopify scales, it will inevitably gain more attention from giants like Amazon, which will try to fend off the younger player from taking market share. With enormous resources (financial, human talent, and technology), Amazon could pose a threat to Shopify's ongoing expansion.
For example, Amazon could offer a more comprehensive set of tools (including logistics, cloud computing, and AI solutions, as well as advertising) to attract key Shopify merchants to its marketplace.
Beyond competition risk, Shopify is increasingly facing macro risks, especially now that it has sellers globally. The recent tariff war has become increasingly burdensome for small and medium-sized sellers to conduct business, which could lead to either lower sales volumes or even the outright closure of their businesses.
If merchants suffer, Shopify will feel the pain since its revenue is closely tied to merchants' success.
It doesn't help that Shopify's stock trades at a significant premium, posing substantial rerating risks if the company fails to meet investors' expectations. As of the time of writing, Shopify's stock trades at a price-to-earnings (P/E) ratio of 110, a high figure by any standard.
What it means for investors
Shopify has a solid track record of execution and growth, leveraging its business model and customer-obsessed culture. These advantages strategically position it to sustain its growth momentum.
Still, investors should not expect a smooth ride, as the tech company must fend off competitors while navigating turbulent macroeconomic situations, such as tariffs. And with the stock trading at premium levels, buying the stock today is not for the faint-hearted.
Only those with a long time horizon (more than five years) and a strong conviction should consider buying the stock.
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