With Shopify Inc (US), Wait for Big Gains in the Long Term

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Alongside a few other big growth tech names, e-commerce solutions provider Shopify Inc (US) (NYSE: SHOP ) is one of the best long-term investments in the stock market.

It's a secular growth story with long-running catalysts that should drive big growth into the foreseeable future. There are also healthy margin expansion drivers which should supercharge earnings growth over the next several years. And the valuation on Shopify stock is reasonable, considering the company's robust growth prospects.

That combination of big growth, long runway, and reasonable valuation makes SHOP stock a name to own for the long haul.

But that isn't to say Shopify stock will head up in straight-line fashion. Shopify stock has actually had a tough time recently. Ever since a Citron short report knocked SHOP stock off its $120s peak, it's just been range-bound between $90 and $110.

Investors should view recent weakness in SHOP stock simply as a consolidation period before another big run higher. Here's why.

Shopify Stock's Growth Story Remains Intact

As with many other big tech stocks, the catalysts supporting Shopify's outsized growth aren't going anywhere anytime soon. Those catalysts include growth in e-commerce, small businesses, and cloud solutions.

Despite gaining some scale, the e-commerce trend hasn't slowed recently, nor will it slow anytime soon. E-commerce sales have consistently grown around 15% per year, while its share of the total retail pie has consistently grown by about 1 percentage point year-over-year. But e-commerce sales still only represent 9% of total retail sales in the U.S. That means there is a long runway for this huge growth in e-commerce to continue.

This is also a global phenomena. Just look at Shopify's Black Friday weekend numbers to understand that e-commerce growth is robust across the globe.

The small business trend isn't slowing, either. A healthy economy is normally exceptionally favorable to small businesses. Right now, the U.S. economy is firing on all cylinders. Consequently, until the economy reverses course, the number of small businesses interested in using Shopify should increase.

Lastly, the cloud solutions trend has a ton of momentum. According to research firm Canalys , the cloud infrastructure services market grew by 42% in quarter 1, 47% in Q2, and 43% in Q3. In other words, growth rates for the whole market have been relatively constant throughout the year. This growth won't get derailed anytime soon. More and more businesses are migrating to the cloud, and cloud-hosted solutions are now becoming the norm. Even the U.S. government might shift to cloud-hosted services.

With all these catalysts in place for many years to come, Shopify stock won't get knocked off its long-term upward trajectory any time soon.

Shopify Stock Remains Undervalued

From a numbers standpoint, I think SHOP stock is materially undervalued below $125.

Earnings are expected to increase by more than five-fold next year. They are also expected to nearly triple the following year. That big growth won't all of the sudden fall out of the sky over the subsequent two years.

This is a secular growth story. As long as e-commerce continues to explode on a global basis (and all current trends indicate that it will), big revenue growth will remain a constant.

So will tremendous margin expansion. Big revenue growth normally leads to healthy expense leveraging. Plus, the company has higher margins in its international business that it does in its North American business, so as Shopify becomes more of an international-led growth narrative, margins should go up.

Consequently, if big revenue growth is here to stay and so is healthy margin expansion, then big earnings growth is also here to stay. After growing by a factor of 5 next year and tripling the year after that, earnings growth should at least grow somewhere around 100% per year after that.

The S&P 500 is currently trading at a 90% premium to its multi-year earnings growth prospects (20.4x this year's earnings for 10.7% growth). SHOP stock easily deserves a 100% premium given bigger growth in out-years. A 100% premium on 100% growth prospects implies a "fair" earnings multiple in two years of 200. A 200 multiple on fiscal 2019 earnings estimates of $0.76 implies a two-year forward price target of $152.

Discount that back by 10% per year, and you get to a present value of about $125.

Bottom Line on Shopify Stock

I think the game-plan here is quite simple: Buy now, and hold for several quarters and even years. Patience will be rewarded with this secular growth story.

As of this writing, Luke Lango was long SHOP.

More From InvestorPlace

Compare Brokers

The post With Shopify Inc (US), Wait for Big Gains in the Long Term appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos