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Growing Merchant Base Spells Good News for Shopify
Stock Analysis & Ideas

Growing Merchant Base Spells Good News for Shopify

The e-commerce boom has led to an expansion in multi-channel e-commerce platform provider Shopify’s (SHOP) merchant base. This has led to a strong uptick in various aspects of its services, such as Shopify Shipping, Shopify Payments, and Shopify Capital, a trend which was observed in the company’s second-quarter results.

Moreover, the company’s focus on maintaining a regular flow of new merchants and retention of existing merchants seems to be paying off. Offerings and features such as Shop Pay, Shop Pay Installments, and end-to-end order tracking are attracting solid adoption: in 2020, Shopify added 700,000 merchants to its platform.

Importantly, partnerships with big names like Facebook (FB) and Google (GOOGL) are also a boost to Shopify’s visibility and are expected to attract more merchants. Furthermore, merchant retention has been on the rise for Shopify. “More merchants on standard plans upgraded to Shopify Plus and more international brands joined Shopify Plus to grow their businesses,” testified management in its second-quarter earnings call.

This brings us to Shopify’s expanding international merchant base. A number of significant brands were added to the company’s international merchant roster this year, including Netflix (NFLX), luxury fashion designer brand Diane von Furstenberg, well-known footwear and accessories company ALDO, and fashion brand James Perse.

The financials of Shopify are also impressive. In its last reported quarter, revenues increased 57% year-over-year to $1.12 billion. A net profit of $879.1 million was also recorded. A strong balance sheet with ample liquidity is another positive that Shopify is known to maintain, with cash, cash equivalents, and marketable securities of $7.76 billion, and no meaningful long-term debt.

A profitable company with a solid balance sheet is remarkable for a growth company, especially in the e-commerce industry. (See Top Smart Score Stocks on TipRanks)

It is important to mention here that Shopify is headed by its CEO Tobias Lutke, who also happens to be its co-founder. As is well known, leadership plays a vital role in the company’s growth and outlook, and a founder acting as the CEO increases the chances of a company achieving success. This may be a point that influences the growing market capital of Shopify.

Mirroring this optimism, in the past two weeks, two analysts gave Buy ratings to Shopify. First, Robert W. Baird analyst Colin Sebastian reiterated a Buy, with a price target of $1650. A few days later, Wolfe Research analyst Deepak Mathivanan also reiterated a Buy rating, although he lowered the price target to $1940 from $1980.

When it comes to Wall Street, the analyst consensus holds a cautiously optimistic stance on Shopify with a Moderate Buy rating, based on 15 Buys and 9 Holds. The average Shopify price target of $1,736.77 indicates an upside potential of 26%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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