After trailing the markets significantly in 2022, tech stocks have made a stellar comeback this year. For instance, Shopify (TSX:SHOP) stock was trading 80% below all-time highs in 2022 and has gained roughly 120% year to date.
Valued at a market cap of $135 billion, the TSX tech stock has crushed broader market returns, as investors expect the macro environment to improve in the next 12 months on the back of lower interest rates.
Let’s see if you should buy Shopify stock at its current valuation right now.
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Shopify is a key e-commerce player
Shopify operates in the e-commerce space, providing essential digital infrastructure to small, medium, and large businesses. It offers a portfolio of products and services to enterprises, enabling them to start, scale, market, and run an online retail business.
The Shopify platform has onboarded over two million merchants in 175 countries, including billion-dollar companies such as Mattel, Netflix, and Skims. It is also the second-largest e-commerce platform in the U.S. after Amazon, with a market share of 10%.
Similar to several other tech companies, Shopify experienced robust demand for its products amid COVID-19, as brick-and-mortar retailers were forced to set up an online store. However, as economies reopened and the macro economy turned challenging, Shopify saw a steep decline in top-line growth in recent quarters.
Despite macro headwinds, the Canadian tech giant is forecast to increase sales by 25% year over year to $9.35 billion in 2023 and by 19.3% to $11.16 billion in 2024, according to Bay Street. In order to boost its profit margins, Shopify also exited its fulfillment centre business and lowered operating expenses in 2023. Analysts expect adjusted earnings to grow to $1.38 per share in 2024, up from $0.05 per share in 2022.
Priced at 75 times forward earnings and 12 times forward sales, Shopify stock trades at a hefty premium.
The holiday quarter is key for Shopify stock
The ongoing holiday season is crucial for Shopify and other e-commerce players. During the Black Friday Cyber Monday (BFCM) weekend, Shopify merchants sold US$9.3 billion worth of products, an increase of 24% year over year. Around 61 million customers purchased from Shopify-powered brands with an average cart price of US$108.12.
Moreover, sales processed via Shop Pay grew 60% year over year, as over 55,000 merchants had their highest-selling day ever over the BFCM weekend.
Analysts expect Shopify to increase sales by 19.7% to $2.77 billion, while earnings might rise by 355.6% to $0.41 per share in the fourth quarter (Q4) of 2023. If Shopify beats these estimates and provides a better-than-expected forecast, the stock should gain momentum, despite its lofty valuation.
Shopify is widening its ecosystem
Shopify continues to expand its portfolio of products, resulting in higher customer engagement rates and a widening merchant base.
The company has increased its gross merchandise value from US$41 billion in 2018 to US$197.2 billion in 2022. With a total addressable market of over US$850 billion, Shopify has enough room to grow its top line, given its sales are estimated to surpass $11 billion next year.
Despite the steep valuation surrounding Shopify stock, its improving profit margins and impressive revenue growth make it a top buy right now.
