Shopify's [SHOP] share price has had an impressive 2020 so far. The stock is up around 154.33% so far this year and shows no sign of slowing down yet. Small businesses making the switch to online storefronts during the coronavirus pandemic have largely been driving Shopify’s share price gains.
With lockdown easing across the world, will Shopify's share price gains start to tail-off, or is this just the beginning?
What has driven recent gains in Shopify's share price?
Shopify's share price has benefitted from a coronavirus-triggered shift to online trading for many businesses. Second quarter results show just how seismic this shift has been. During the quarter, Shopify brought in $714.3m in revenue, up 97% from the same quarter in 2019. Adjusted gross profit came in at $381.4m, up 84% from last year.
Gross merchandise volume (GMV) on Shopify's platforms increased 119% in the second quarter. GMV accelerated in April and May, although Shopify admitted this had cooled off in June and July as lockdowns began to ease.
Meanwhile, Shopify’s GMV point-of-sale channel shows the impact of coronavirus on traditional shops, revealing that purchases made in physical stores dropped 29% quarter-on-quarter in Q2. Shopify revealed that most of this decline came in April and May, and since stores started to reopen GMV has started to recover. New stores created on the platform increased 71% compared to the first quarter of this year.
“The COVID-19 pandemic has accelerated the growth of ecommerce, shifting a larger share of retail spending to online commerce, a trend we believe will persist. While COVID-19 has significantly influenced online store creation and consumer spending behaviour, the magnitude and duration of its future impact remain uncertain in view of the greater likelihood of an extended global recession,” said Shopify in a press release announcing second-quarter earnings.
A second wave of coronavirus could amplify the impacts of the seemingly unavoidable recession, but if Shopify can continue to get traditional bricks-and-mortar shops online, then the direct effect on Shopify’s share price could be minimal.
“The COVID-19 pandemic has accelerated the growth of ecommerce, shifting a larger share of retail spending to online commerce” - Shopify in Q2 press release
Will Shopify's share price see long-term gains?
The big concern for investors is that Shopify's share price gains have been driven by the coronavirus changing how people shop. With hopes of a return to something like normality in the next couple of years, there is a chance that Shopify's recent growth will also return to pre-pandemic levels. Shopify seems aware of this problem, declining to offer third-quarter guidance in the face of so much economic uncertainty.
Data software company Trefis argues that Shopify's earnings could increase seven-fold by 2025. Writing in Forbes, Trefis cites a near doubling in merchant service sales, continued growth in SaaS subscriptions and expansion into fulfilment. This latter point could see Shopify become a "more merchant-friendly alternative to Amazon", a prospect that would promise increased margins and revenues.
"...we believe that Shopify’s Revenues could grow by over 3.5x from estimated levels of $2.6 billion in 2020 to close to $9 billion by 2025, representing a growth rate of almost 29% per year (for context annual growth was about 60% over the last three years)," wrote Trefis.
All in all, Trefis reckons Shopify's share price could gain circa 70%, with a market cap north of $220bn. This depends on earnings growth and its price-to-earnings ratio dropping to around 110x in the next few years.
“We believe that Shopify’s Revenues could grow by over 3.5x from estimated levels of $2.6 billion in 2020 to close to $9 billion by 2025” - Said data software company Trefis, in Forbes
So, time to buy Shopify?
Shopify is looking at another strong quarter when it next updates the market in the Autumn. Wall Street is expecting earnings to come in at $0.48 per share, up from a $0.29 loss per share for the same period last year. Revenue is again expected to come in strong at $646.67m, up 65.6% from the previous year.
The stock has a $1,094.83 average price target from the analysts tracking Shopify's share price on Yahoo Finance. Hitting this would see a 5.56% upside on the current share price as of 25 August’s close. Of the 29 analysts offering recommendations, 18 have either a Strong Buy or Buy rating on the stock.
With more stores than ever now using Shopify, the company has certainly benefited from the pandemic. On balance, if the shift to online shopping continues for small retailers, then Shopify could be something of a bargain at the moment.
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