Shopify (SHOP 4.90%) surprised the market with its better-than-expected earnings results in the first quarter. The stock has rebounded 78% year to date.
For investors who have held the stock through the roller coaster of the last few years, it might be tempting to get out while the going is good. But you might be selling a long-term compounding machine -- just at the time it is starting to regain momentum.
Even after the sharp rebound, the stock is still selling 67% off its all-time high, and Shopify is proving it's still the go-to e-commerce platform for small businesses.
Shopify isn't done
The stock entered 2023 trading at its lowest price-to-sales valuation since its first year as a public company seven years ago. That means low expectations for revenue growth, and for understandable reasons. A slowing economy and other macro-related headwinds caused the U.S. e-commerce market to flatten last year after years of strong growth.
However, the market didn't seem to notice that Shopify's revenue has been accelerating. It reported revenue growth of 25% year over year, which continued a trend that started in the second half of 2022. The company's top-line growth hit a low point in the second quarter last year before accelerating to 22% in the third quarter and 26% in the fourth quarter.
The market's worries over inflation and consumer spending heading into the new year caused it to overlook the momentum that was building all along.
Most telling were the drivers behind Shopify's numbers. Shopify reported a 31% year-over-year increase in merchant solutions, led by higher gross merchandise volume (GMV) and growing penetration of Shopify Payments. But it's the reasons management gave for this growth that speaks volumes about the improving outlook for the e-commerce market right now.
During the earnings call, CFO Jeff Hoffmeister said the main drivers of the growth in GMV were "more resilient consumer spend, with strength in Europe being particularly notable." He also noted growth in same-store sales with existing merchants and overall growth in the merchant base.
Shopify makes up about 10% of U.S. e-commerce, so it's a good barometer of the health of the overall landscape. But another reason to like Shopify right now is what the growth in the merchant base says about the future. One reason a small business signs up for Shopify is that they see opportunity ahead.
Why the stock could climb higher
Shopify's latest results could be signaling a recovery on the horizon across the e-commerce landscape. Indeed, the company guided for second-quarter revenue growth to be roughly on par with the first quarter. As the outlook for e-commerce spending improves, merchants will seek out the right solutions to capitalize on the opportunity, which would further boost Shopify's financial results, acting as a catalyst.
For example, management pointed out that Shopify Audiences, a feature that helps businesses scale their ad campaigns online, is now a key reason merchants choose to upgrade their subscription plan.
Shopify is constantly improving and expanding its offering, including recently expanding the capabilities of its point-of-sale solutions and integrating artificial intelligence to make the Shop App a smarter mobile shopping assistant.
Management believes the opportunity over the long term is still enormous, and with the company starting to find its mojo again, I wouldn't underestimate the stock's return potential in the years to come.
