Shopify Inc (TSX:SHOP) stock has been rallying hard all year long. Since the start of the year, it has risen 63%, a market-beating return by any stretch of the imagination. This is interesting because many of the negative things people said about Shopify last year remain true. In 2022, Shopify stock crashed more than 70%, because its growth slowed down from 2021 levels and it became unprofitable. As of the first quarter earnings release, SHOP’s revenue growth is still down from 2021 levels and operating earnings remain negative. However, there are some signs that the company’s fortunes will turn around. In this article, I will explore the factors that have got investors feeling optimistic toward Shopify stock.
Last earnings beat expectations
The first thing that got investors excited about Shopify this year was the company’s most recent earnings release. In the quarter, SHOP delivered:
- $49.6 billion in gross merchandise volume, up 49.6%.
- $1.5 billion in revenue, up 25%.
- $717 million in gross profit, up 12%.
- A $193 million operating loss.
- $68 million in net income, up from a loss.
- $0.05 in diluted EPS, up from a loss.
- Guidance for revenue to continue growing at near 25% in Q2.
It was a pretty good showing. The company became profitable again after several quarters of losses, and beat analyst estimates on both revenue and earnings. The earnings release was well taken by the markets, triggering a rally shortly after it came out.
Hype surrounding AI
Another factor lifting Shopify stock this year is hype surrounding artificial intelligence (AI).
In November 2022, ChatGPT launched and quickly became the fastest growing web app in history. Shortly afterward, other tech companies started jumping into the fray, coming up with their own AI offerings. Shopify got involved in the space, using AI to create automated product descriptions and ads. Marketing is one of the most powerful use cases for AI, so naturally, Shopify is taking advantage of it to help vendors.
There’s also the simple fact that all this buying in tech stocks is moving the entire sector. Stocks tend to correlate with (move in the same direction as) their sectors, as many investors buy sector ETFs or follow sector rotation strategies. Basically, these investors buy stocks by sector, ignoring the merits or weaknesses of individual companies. A lot of investors are betting big on tech this year due to the AI phenomenon, and naturally that’s lifting all tech stocks, whether or not they are deeply involved in AI.
Foolish takeaway
After a year in the dumps, Shopify stock is once again rallying and outperforming the market. The stock still hasn’t reclaimed its all-time high, but it is rising very quickly. Could it keep rising? Sure. I don’t personally think it has a shot at re-taking its all-time high, but it may well rise from its current level. Profitability is within sight once again, and growth is at least stable. SHOP’s days of 86% revenue growth are over, but it’s still a growth stock with a lot of potential.
