In 2018, Apple famously became the first publicly traded company in the U.S. to hit a $1 trillion valuation. Since then, several more have hit that milestone, including several of Apple's peers in the tech industry: Microsoft, Alphabet, Amazon, Nvidia, and Meta Platforms. This group remains highly exclusive, but many more corporations will join in the coming years. One of them could be Shopify (NYSE: SHOP), an e-commerce specialist currently sporting a market cap of $135 billion.
Shopify needs a compound annual growth rate (CAGR) of at least 14.3% in the next 15 years to become a trillion-dollar stock. That's not an easy task, but let's find out why Shopify can pull it off.
A founder-led company with a vision
Shopify was created to address a real pain point for businesses trying to open online storefronts, which sometimes had to deal with design challenges, lack of flexibility, and other issues. Shopify changed that. The e-commerce specialist offers practically everything merchants need all in one spot, from hundreds of customizable templates and payment processing to inventory, social media tools, marketing, and more.
Further, there is a built-in system that gives merchants many more options. Shopify's app store is home to thousands of apps that cater to its customers' ultra-specific needs. Since its 2015 IPO and with co-founder Tobias Lütke at the helm, Shopify has grown at a CAGR well above what it would need in the next 15 years to become a trillion-dollar stock.
SHOP Total Return Level data by YCharts.
There is some evidence in the academic literature that founder-led companies in the S&P 500 outperform the rest. It's hard to argue that point when looking at the list of trillion-dollar companies. Nvidia and Meta Platforms are still headed by their co-founders. Amazon was also founder-led until relatively recently, and Microsoft and Apple did have long stints with their respective founders (or co-founders) as CEOs before they stepped down.
Shopify following the same blueprint is no guarantee of success, but it's worth pointing out that the e-commerce specialist has made it its goal to become a 100-year company. Few can come anywhere close to that, but Shopify is off to a pretty good start.
Massive white space ahead
One issue Shopify had was a lack of profitability. The company recently made some changes to its business that are helping on that front. Shopify sold its logistics business, a low-margin unit that was harming its bottom line. Since then, the company's margins and profits have looked much better. In the third quarter, Shopify's revenue grew by 26% year over year to $2.2 billion. Shopify's net income was up 15% year over year to $828 million.
It had a 19% free cash flow margin, up from the 16% reported in the prior-year quarter. Shopify has increased its free cash flow margin sequentially during every quarter this year. No wonder the stock is up substantially year to date. More importantly, Shopify is still looking at a vast runway ahead. The growth of the e-commerce industry should provide the company with a powerful tailwind in the next decade and beyond. It allows people to do business with consumers or companies that would otherwise be beyond their reach.
It also helps businesses save money on overhead costs, savings they can pass on to consumers. And despite its seeming ubiquity, e-commerce still has miles of growth left. Online transactions accounted for just 16.2% of total retail sales in the third quarter in the U.S. Further, Shopify benefits from a competitive advantage. Its app store has a network effect: The more developers within its ecosystem, the more it attracts merchants, and vice versa. The company's main e-commerce offering benefits from switching costs.
So, Shopify has many of the traits necessary to deliver market-beating returns over the long run: profitable growth, a long-term vision, plenty of opportunities, and a moat that will protect its leadership position in its niche. The company looks well on its way to becoming a trillion-dollar stock within 15 years.
Should you invest $1,000 in Shopify right now?
Before you buy stock in Shopify, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Shopify wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $869,885!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 18, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Prosper Junior Bakiny has positions in Amazon, Meta Platforms, and Shopify. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Shopify. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
