Shopify (NYSE: SHOP) has been an incredible growth stock since it went public nine years ago. It’s up 1,936% over this time, even after falling 65% since November 2021.
The company’s all-in-one platform helps businesses build an online store in a matter of minutes. It offers tools to manage sales, process orders, track inventory, accept payments, and market products.
Over 1.75m merchants in 175 countries are now on Shopify’s platform. And while it isn’t often thought of as an AI stock, I think the technology could give it a key competitive strength moving forward. Here’s why.
Improving the customer mix
Shopify grew rapidly during the pandemic when everyone was stuck at home and shopping online. Yet unlike many other e-commerce firms, it’s kept growing post-pandemic.
Revenue increased to over $7bn last year, up from $1bn in 2018, while gross merchandise volume jumped 20% to $236bn. Wall Street sees revenue rising to almost $15bn by 2028.
My mate has run his online beauty box business through Shopify for over a decade. He waxes lyrical about the platform and how its tools make everything run seamlessly.
In fact, I got interested in the stock when he said he could never imagine switching to a rival. High switching costs create deep customer loyalty and cement a powerful competitive advantage.
Shopify’s bread and butter is to empower small businesses to sell online. But more recently it has been strategically focused on attracting larger companies.
In 2023, it added Nike Strength, Dollar Shave Club, Banana Republic Home, and Boardriders (owner of brands Quiksilver and Billabong). These joined existing large customers like Gymshark and Red Bull.
Shopify Magic
Last year, the company also launched Shopify Magic, a suite of free AI-powered features that automate many time-consuming aspects of running an online business.
These include things like writing product descriptions and creating professional-looking images. Just type in a few keywords and Shopify Magic fills in the rest, generating product descriptions that are SEO-friendly and focused on driving sales.
Also, Shopify has combined its own and merchants’ data with Open AI’s GPT to create a conversational AI assistant called Sidekick. Merchants can ask it anything about the platform and get it to compile reports on best-selling products.
The real magic
However, these are internally produced AI solutions. I think the real power might lie with external developers. You see, Shopify has a large developer marketplace, which is similar to Apple‘s App Store.
This allows coders to build new features and tools — including AI features — straight into Shopify’s platform. They earn revenue from merchants who purchase and use them.
Its global base of nearly 2m merchants understandably attracts many developers. Therefore, the firm should be able to integrate more third-party AI tools into its platform at a much faster rate than its rivals. And this should strengthen its competitive position.
Valuation
Now, as much as I love Shopify, the reality is that this is an expensive stock. It’s trading on a forward price-to-earnings (P/E) ratio of 58. There’s little margin for error at that multiple, which potentially adds risk for new investors.
That said, I expect revenue to grow at 20% for many more years. If profit margins also expand, then I think the stock will do very well.
