Investing in quality growth stocks can help you deliver market-beating gains over time. So, it’s crucial to identify a portfolio of companies in expanding addressable markets that are positioned to benefit from multiple secular tailwinds.
One such Canadian tech stock is Shopify (TSX:SHOP), which has already returned 3,000% to shareholders since its IPO (initial public offering) in 2015. Valued at $127 billion by market cap, Shopify is among the largest companies in Canada. Despite its outsized returns, Shopify stock trades 54% below all-time highs, allowing you to buy the dip.
Let’s see why I expect Shopify stock to surge around 200% by 2030.
Shopify is an e-commerce giant
Shopify offers a robust platform for small, medium, and large businesses looking to set up an online presence. Merchants must diversify their online presence rather than depend on e-commerce companies such as Amazon, Etsy, or eBay, making Shopify the platform of choice in the U.S., Canada, and other international markets.
While Shopify competes with companies including Wix and Squarespace, its competitive advantages have allowed the Canadian giant to grow at a much faster pace. For example, Shopify’s no-code platform allows those with zero tech expertise to build a customizable website easily. Over the years, Shopify has expanded its portfolio of products and services to include digital marketing, inventory management, and payment processing.
While Shopify offers subscription services to companies, its payment processing segment now accounts for 75% of total sales. Moreover, the business is growing as a percentage of GMV, or gross merchandise volume, increasing from 58% to 61% in the last 12 months.
Similar to other online companies, Shopify experienced rapid growth amid the COVID-19 pandemic. While sales have decelerated in recent years, it reported revenue of US$3.9 billion in the last six months, an increase of 22% year over year.
In the last two years, Shopify has focused on lowering its cost base and improving the bottom line. It also exited the low-margin logistics business and consistently reports a positive free cash flow.
Is Shopify stock undervalued?
Shopify’s sales are forecast to increase by 21.7% to $11.74 billion in 2024 and by 20.5% to $14.15 billion in 2025. Comparatively, its earnings are forecast to expand from $1 per share in 2023 to $1.8 per share in 2025. So, Shopify stock seems expensive at nine times forward sales and 54 times forward earnings.
However, its operating margin has improved to 12.2% from just 3.7% in 2023 in the last 12 months. Shopify’s focus on cost-cutting has meant its free cash flow has totalled US$1.28 billion in the last four quarters compared to US$485 million in 2021.
According to consensus estimates, Shopify will end 2028 with adjusted earnings of $7 per share. So, priced at 40 times forward earnings, Shopify stock should trade at $280 by September 2028, indicating an upside potential of 200% from current levels.
The Foolish takeaway
While Shopify might seem overvalued right now, its expanding profitability and steady revenue growth make it a top investment choice in 2024. Analysts remain bullish on Shopify stock and expect it to gain 50% in the next 12 months.
