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Shopify (NYSE: SHOP) has become the go-to e-commerce solution for millions of merchants globally. That gives it tremendous power in the industry and also means it's going to benefit from growing e-commerce trends. According to Statista, in the U.S. alone, e-commerce is expected to jump from 16.6% of retail sales this year to 20.6% by 2027.

The market is expecting a lot from Shopify, as indicated by its highly valued stock. Can Shopify be your ticket to millionaire status over the next decade?

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The top name in a top industry

Shopify's e-commerce niche is powering small businesses through its complete platform. It's the behind-the-scenes infrastructure bringing tons of retailers online and allowing them to participate in the e-commerce revolution. Although Shopify is not as big as Amazon, which as a business accounts for 37.4% of all e-commerce, as a platform, it's actually competitive.

Amazon's online stores and third-party sellers together generated $100 million in the third quarter, and Shopify's platform processed $70 million in gross merchandise volume (GMV). Shopify's GMV increased 24% year over year in Q3. That's faster than Amazon's online sales, which increased 7%, and third-party sales, which increased 10%. These aren't perfect comparisons, but they both represent the amount sold in the quarter.

Shopify doesn't count this as revenue, because it only takes fees related to the merchandise its clients sell. The company makes money in two ways: Monthly subscription fees and payment processing fees. The payment processing business is by far the bigger one, accounting for 72% of the total in Q3.

Sales are growing at a fast pace, up 26% year over year in Q3. Shopify is also becoming profitable. Operating income increased from $122 million last year to $283 million this year in the third quarter, and net income rose from $718 million to $828 million this year. Free cash flow increased from $276 million to $421 million, and free cash flow margin improved from 16% to 19%.

Investors were thrilled with the Q3 report and fourth-quarter guidance, which calls for accelerating sales growth and a free cash flow margin similar to the third quarter's.

Tailwinds and opportunities

What makes Shopify so compelling is that it still has massive opportunities. Part of that comes from the increase in e-commerce, and some of it comes from the many innovations it's constantly launching. In the short term, the company has tailwinds in an improved economy as inflation moderates and interest rates come down.

Although e-commerce is its bread and butter, Shopify also offers physical store solutions for complete omnichannel packages. These are hardware products like point-of-sale (POS) devices and software services like payment processing and operational management. It's an ideal platform for sellers who want to combine their physical locations with a digital presence using a seamless program.

Shopify has also expanded from offering total packages to offering single services. That's opened up business from larger, enterprise clients who don't need everything from soup to nuts, but might be looking for a new payment processor or POS provider. Shopify sees its future as an integrated e-commerce platform, and it partners with many major players like Amazon and PayPal. It recently became Roblox's first commerce integration partner.

Some of Shopify's biggest potential comes from international businesses, where it's growing at an even faster pace. International merchants increased by 36% in Q3. It's also bringing international sales to all clients through Shopify Managed Markets, which recently launched. It found that clients increased the countries they sold to by 83% after joining the program, and international sales increased by more than 40% on average for clients in the program.

Priced for perfection

The only drawback here is the price. Shopify stock trades at a price-to-sales ratio of 18 and a forward price-to-earnings ratio of 76. That's a premium valuation, and it means that Shopify stock will fall on any bad news -- which has happened in the past. To sustain these levels, the company must meet the market's expectations, every time.

Over the next 10 years, Shopify's sales and earnings multiples should decline as the company grows. If it can maintain a compound annual growth rate (CAGR) of 15%, it will reach trailing 12-month sales of $33 billion. At a price-to-sales ratio of 5, which I'm picking randomly to represent an example of a much lower multiple, it will have a market cap of $165 billion, or only 11% higher than today's. But can Shopify sustain its premium valuation for the next 10 years?

For the stock to go higher, it needs to sustain a CAGR of higher than teen percentages or a higher valuation. But it won't warrant the higher valuation unless it's also delivering on the higher sales growth. A CAGR of 20% over 10 years with a price-to-sales ratio of 9, half of today's number, brings us to a market cap of $450 billion, or about 200% higher than today. Those aren't groundbreaking results.

This is just an exercise to get a sense of how things could look in 10 years. I don't think investors can count on Shopify as a ticket to millionaire-maker status the way things look right now, even though it's an excellent company. I would say, though, that investors should keep it on their radar in case the price falls significantly.

Should you invest $1,000 in Shopify right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, PayPal, Roblox, and Shopify. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. 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.

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