On March 31, Shopify(NASDAQ: SHOP) removed its U.S. shares from the New York Stock Exchange and relisted them on the Nasdaq Stock Exchange. The company did not give an explicit reason for the change, but the goal was probably to make itself eligible for inclusion in the Nasdaq-100.
Palantir Technologies relisted its stock for that very purpose last year, and the decision paid off. The company was added to the Nasdaq-100 on Dec. 23, and its share price has since climbed 7% as of April 2, despite a decline in all three major U.S. stock market indexes over the same period.
If Shopify is selected for the Nasdaq-100, history says the stock could pop in the following months. Here is what investors should know.
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What typically happens when a company joins the Nasdaq-100 index
The Nasdaq-100 measures the performance of 100 large companies listed on the Nasdaq Stock Exchange. The index is reconstituted (i.e., stocks are added and deleted) annually in December, though its composition can also be modified throughout the year if a listed security becomes ineligible.
Importantly, Shopify currently has a market value of $131 billion, which ranks among the 35 largest companies listed on the Nasdaq. Consequently, Shopify has excellent odds of being added to the Nasdaq-100 sometime this year.
More than 90 companies were added to the Nasdaq-100 in the last decade. Excluding the ones that have been members for under a year, stocks returned an average 16% during the 12-month period after their inclusion in the index. While not earth-shattering, that still implies meaningful upside for Shopify if the company is chosen to join.
Readers may wonder why stocks typically pop following their addition in the Nasdaq-100. The answer lies in the numerous investment products tied to the index, which collectively control hundreds of billions of dollars. For instance, the Invesco QQQ Trust would have to buy shares of Shopify to ensure the fund accurately tracks the benchmark index.
Bloomberg recently reported, "Inclusion in benchmarks is becoming more important for companies in a world increasingly dominated by passively managed investment funds." Of course, whether Shopify is a smart long-term investment is another question entirely.
The investment thesis for Shopify
Shopify provides turnkey solution for omnichannel commerce. Its software helps merchants manage their businesses across physical and digital stores, including online marketplaces, social media, mobile apps, and branded websites. It also provides adjacent tools for marketing, logistics, and payment processing, as well as solutions for wholesale and cross-border commerce.
Shopify is the market leader in e-commerce software. Its merchants' share of online retail sales exceeds 12% in the U.S. and 6% in Western Europe. That makes Shopify the second-largest e-commerce platform behind Amazon in those regions, which puts the company in a favorable position. Retail e-commerce spending is forecast to grow at 11% annually through 2030.
Shopify has an even larger opportunity in wholesale (i.e., business-to-business or B2B) e-commerce. Forrester Research recently ranked the company as a leader in B2B commerce solutions, citing speedy innovation and artificial intelligence capabilities as key strengths. Wholesale e-commerce spending is forecast to grow at 18% annually through 2030, and the market is already three times larger than retail e-commerce.
Shopify reported strong fourth-quarter financial results. Revenue increased 31% to $2.8 billion, the second straight acceleration. Management highlighted particularly strong sales growth in three areas: wholesale, offline retail, and international commerce. Meanwhile, non-GAAP earnings rose 29% to $0.44 per diluted share.
Importantly, operating expenses as a percentage of revenue reached its lowest level since Shopify went public in 2015, meaning the company has become increasingly efficient in its ability to turn revenue into profits. Also important, take rate increased 12 basis points in the fourth quarter, meaning the company kept a little more of each dollar spent on its platform.
Shopify values its total addressable market at $850 billion. Wall Street estimates adjusted earnings will grow at 26% annually through 2026, which makes the current valuation of 76 times adjusted earnings look rather expensive. But Shopify beat the consensus estimate by an average of 16% in the past four quarters, and I think that pattern will persist as it leans into opportunities in wholesale, offline retail, and international commerce. Investors should feel comfortable buying a small position today.
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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. Trevor Jennewine has positions in Amazon, Palantir Technologies, and Shopify. The Motley Fool has positions in and recommends Amazon, Palantir Technologies, and Shopify. The Motley Fool has a disclosure policy.
