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My Best Growth Stocks to Buy in May (And It’s Not Even Close)

By on May 5, 2022 0

Share price of Shopify (STORE 4.36%) have been completely demolished lately. After hitting an all-time high of $1,762.92 per share on November 19, 2021, Shopify stock has now fallen 70% in less than six months.

In retrospect, Shopify stock probably got ahead of itself. But its valuation is finally showing signs of being more reasonable for investors who have been waiting for an opportunity to consider Shopify. Here’s why Shopify is my best growth stock to buy in May.

Image source: Getty Images.

An overview of e-commerce

Probably the simplest reason to invest in Shopify is the belief that small business and retail are moving online. The COVID-19 pandemic has accelerated the adoption of e-commerce. But online sales are still only a small slice of the total retail pie.

According to the Department of Commerce’s Census Bureau, e-commerce sales were $870.8 billion in 2021 and accounted for 13.2% of total US retail sales, compared to 13.6% of the total. of retail sales in 2020. In 2021, Shopify provided 10.3% of Online Sales in the US This means that Shopify generated 1.36% of total retail sales in the US, which is amazing given the youth of the company.

An investment in entrepreneurship

Estimates vary, but small businesses account for about 40-50% of US gross domestic product (GDP). Shopify has big customers. But the entrepreneurial spirit is centered on small and medium-sized enterprises (SMEs). After all, its mission is “to make commerce better for everyone”. In this sense, Shopify tries to empower individuals to get creative and build a business without the overhead required of a physical store.

While companies like Wix.com or square space are arguably better than Shopify for websites that aren’t focused on selling something, Shopify’s easy-to-use cloud software takes the cake for serious sellers. Shopify offers options when it comes to how the site looks, which checkout process to use, which senders to use, customizing discounts, and more. Its three different payment plans make it easier to access more services as the business grows.

For example, the $299 per month Advanced option provides more employee accounts, inventory locations, and advanced reporting, as well as automates some e-commerce functions, connects with third-party shippers to save on rates and offers discounts on credit card rates and transaction fees.

A business that makes sense

What I love most about Shopify is that it’s an easy company to understand, even if you’ve never actually used it from a merchant perspective. Shopify makes money in two ways – from subscription solutions and merchant solutions. Subscription solutions expand when more customers open a Shopify store or when existing customers upgrade from the $29 per month Basic plan to the $79 per month Shopify plan or from the Shopify plan to the aforementioned Advanced plan. Subscription Solutions represented 29.1% of 2021 revenue and 31% of 2020 revenue.

Shopify makes most of its money from Merchant Solutions, which topped $1 billion in revenue in Q4 2021. Merchant Solutions are fees that Shopify customers incur for shipping, payment, or point tools. of sale. The primary driver of merchant solutions is gross merchandise volume (GMV). GMV is a fancy way of telling the total dollar amount going through Shopify and its related apps and channels.

To like eBay and other e-commerce platforms, Shopify makes money from transactions. So, the more money its merchants earn, the more Shopify earns. In that sense, it’s not just about customers opening more sites using Shopify, it’s also about the ability of those customers to grow their business.

What makes Shopify’s business model appealing is that Shopify generates a fundamental amount of money from subscriptions, but then benefits from its customers through its Merchant Solutions division. Therefore, Shopify and Shopify merchants have the same interests, and Shopify wins when its merchants win. It is a completely different business model from other Software as a Service (SaaS) companies such as Adobe – who don’t really care if their customers are doing well, as long as they pay their Creative Cloud subscription bill.

An expensive but attractive investment opportunity

As compelling as Shopify’s buy case is, the stock has a 2023 forward price-to-sales ratio of 5.29 and a 2023 forward price-to-earnings ratio of 66.06. It’s by no means cheap, although as mentioned it’s down over 70% from its all-time high.

But for investors who feel like they’ve missed out on Shopify, the pullback could be the perfect time to open an early position in what is an exciting high-risk, high-reward business with a potentially bright future.