One of the biggest e-commerce platform providers in the world, Shopify (TSX:SHOP), is a popular choice among Canadian growth investors. The company’s stock price has begun to recover from 2022 lows and is up considerably since the beginning of the year as well. Thus, the question many investors have is whether this momentum will continue or if this rally may be getting overdone.
First, it’s important to point out the degree to which Shopify has plunged from its peak. Despite its recent run, Shopify’s valuation remains roughly half of where it was at its peak in late 2021. Thus, for those who see a return to previous valuations, this is a stock that certainly has the potential to double from here.
However, bears who have noted the high-beta nature of this stock and what it’s meant during previous downturns may be wary of investing in the stock right now. This is a company with a high degree of leverage in the North American and global economies. Thus, if a slowdown is ahead, Shopify may be a stock to avoid.
Let’s dive into why I think Shopify may be positioned for continued growth from here.
Shopify’s current positioning
The Canada-based company has performed extremely well over the past few years, establishing itself as one of the e-commerce giants. It has outranked its competitors by offering services to global customers, helping them to enhance their online presence.
Moreover, even after facing competition from major competitors like Amazon and new players in the e-commerce market, Shopify continues to carve out its niche in the world of B2B. Shopify’s easy-to-use platform allows merchants anywhere to set up an online shop, democratizing the world of e-commerce and giving a voice to small businesses everywhere looking for an alternative to Amazon to sell their wares.
Why is Shopify a great buy now?
Shopify’s recently reported third-quarter (Q3) results speak to the reason many growth investors own this stock. The company reported $1.7 billion in revenue in Q3, representing 25% year-over-year growth. The company’s stock price has surged far in excess of this growth rate, suggesting many believe the company is poised to see its growth accelerate over time. Indeed, given the difficult comps 2021 provided and the relatively lower bar in 2022, I think such a scenario could play out.
Shopify’s gross margin grew by an even wider factor of 36% in the previous quarter, suggesting increased profitability could be on the horizon. Thus, Shopify isn’t just a stock investors buy for top-line growth. The company is increasingly growing its earnings per share and cash flow, two key metrics value-focused fundamental investors want to see.
Bottom line
Shopify is more than a growth stock focused on seeking top-line growth at the expense of earnings. The company has shown the ability to produce high margins and maintain its dominant position in what was once a competitive market.
As Shopify continues to grow its market share over time, this is a stock that could be worthy of a much higher valuation. Analysts expect annual sales to grow to $8.4 billion from $5.6 billion previously. Such a growth rate would certainly suggest the company’s valuation can continue to expand if growth can be maintained in the coming years.
The question really comes down to how fast investors think Shopify can continue to grow and how profitable the company can continue to be in doing so. I continue to take the over on this Canadian e-commerce giant.
