Shares of Shopify (TSX:SHOP) have been facing a bit of pressure so far this year, with mixed quarterly earnings results and broader tech wobbliness going into the summer season.
Undoubtedly, Shopify remains one of Canada’s top technological innovators, with skin in the generative AI game, among other intriguing areas. With the stock now down just north of 12% year to date, growth-focused investors may wish to give the name another look while it’s still stuck in limbo.
Indeed, it could take a few more months for the e-commerce juggernaut to gain enough traction to turn green on the year. Either way, I view the tech titan as one of the names to stash in your TFSA (Tax-Free Savings Account) for years.
Recently, the company was on the receiving end of an intriguing upgrade. Whenever such a big-name analyst is hiking the rating or price target, value-focused growth investors should be all ears.
A massive upgrade for Shopify stock: Time to buy?
Brad Sills over at Bank of America (NYSE:BAC) recently stated that the company may have finally “turned a corner” when it comes to “balanced growth and margin.” Indeed, it can be a tough balancing act for a hyper-growth company to make. By betting big on growth drivers (think generative AI bets and other R&D ventures), a company’s margins can stand to take a bit of a hit.
Undoubtedly, a temporary margin hit for a shot at booster sales growth is worthwhile for a firm that seeks to grab a larger slice of a total addressable market (TAM) or take share away from other incumbent players. That said, as a firm matures and interest rates stay slightly elevated, investors appreciate any progress on the margin front. Though less important for a smaller tech innovator (let’s say with a market cap south of $100 million), a firm must show it can shift gears to improve margins as it matures.
Otherwise, the long-term investment thesis may be less than stellar in a world where rates could stay higher for longer. With Shopify boasting a market cap of around $111 million, I do think the firm is maturing in a way that it can grow sales at a decent pace while also jolting margins.
Now, the margin expansion does not need to happen overnight. However, every basis point, I believe, makes a big difference, especially if there’s less of an impact on the growth rate.
Bottom line on SHOP stock
For Shopify, I do see sales growth coming back as the Canadian and U.S. economies eventually recover. Whether lower interest rates give the world economy a nudge remains to be seen.
Regardless, I think investors have plenty of reasons to get behind shares of Shopify now that the firm can grow revenue and free cash flows. In the coming months and quarters, look for more analysts to step up to the plate with upgrades of their own if Shopify can take profitability growth numbers to the next level.
At around 64 times forward price-to-earnings (P/E), SHOP shares look like a relative growth bargain as the firm looks to tap into AI to help it better achieve the growth-to-margin balancing act.
