As 2023 progresses, tech stocks are continuing to recover some of the losses they took in the 2021/22 time period. But how can we make sense of the volatility that has been Canadian tech stocks? And what’s next for the most well known of them all, Shopify (TSX:SHOP)? Will Shopify stock continue its upward climb or are there troubles ahead?
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Shopify stock (SHOP) is a lesson in volatility
The Canadian tech index is up more than 24% year to date. This index includes tech stocks such as Shopify as well as other well known fast-growing Canadian tech names. While the sector’s performance in 2023 has been good, the volatility in this sector has been huge. You see, the index is still 30% below 2021 highs.
This volatility that has characterized tech stocks has been difficult to navigate. We all want the upside, but the downside can be difficult to handle. Similar to the tech index, Shopify’s stock price is up nicely so far in 2023 (+38%). But it’s still trading 60% lower than 2021 highs.
What’s next for Shop stock?
Well, this is a loaded question that’s difficult to answer. But let’s review where we’re coming from first.
Revenue growth has never been a problem at Shopify. In fact, this is its selling point. For example, revenue in Shopify’s most recent quarter increased 28% to $5.6 billion. This follows impressive revenue growth rates of 51% in 2021 and 85% in 2020. This is being driven by strong demand for Shopify’s solutions and a rapid acceleration of online commerce. In a nutshell, gross merchant volume, which is the value of merchandise sold, increased 40% last quarter to $60 billion.
Given this continuing strong trend, I think that the future looks bright for Shopify. The only problem is that the company has yet to show consistent profitability. At the end of the day, the bottom line matters. That’s why it’s good to see consensus expectations indicate that Shopify will, in fact, turn a profit in 2023, and that it will grow from nicely from there.
As Shopify’s big early-stage investments in the business continue this year, it will set the stage for growth and profitability in future years. This is typical of the expansion/growth phase of a company.
Earnings losses to continue — for now
Shopify will be releasing its first-quarter 2023 results on May 4. The current consensus expectation among analysts is calling for a loss of $0.04 per share, as the company continues its heavy investment into the business. Clearly, Shopify is not out of the woods just yet.
However, the good news is that as 2023 progresses, Shopify should start to improve its profitability. With this, we can begin to have more comfort in the stock. As a case in point, right now, the consensus estimate for 2026 earnings per share is $0.52. I realize that this is a ways away, but assuming that this proves to be correct, Shopify’s earnings will grow 1200% from 2022 to 2026.
Motley Fool: The bottom line
At this time, Shopify’s stock price is trading at 11 times sales. This is high but a far cry from when it was trading at multiples of more than 100 times. The sharp decline in SHOP stock, along with continued strong revenue growth have worked together to bring valuations down, and this is a good thing for those investors that are considering establishing a position. With a cash balance of $5.1 billion and positive free cash flow of $90 million, Shopify is in a good position to continue to grow and thrive.
