Shopify (SHOP -5.62%) stock has made a head-turning rebound so far in 2023, up over 80% through early June compared to a 13% increase in the S&P 500. Wall Street was thrilled to hear last month that the company is exiting the costly logistics segment in order to boost efficiency and profitability. Shopify's strong first-quarter sales growth also points to an encouraging return to net profitability on the way.
But are investors being too optimistic, or can the e-commerce platform giant still deliver excellent returns from here? Let's dive right in.
The growth update
Wall Street was excited by the cost savings involved with selling its logistics segment, but Shopify's growth update had more concrete and immediate benefits for fiscal 2023. Sales jumped 27% in the Q1 period that ran through late March, maintaining the strong momentum that investors saw in the fourth quarter of last year.
Engagement and merchant signup trends were positive even after Shopify raised fees significantly. That's great news for the long-term growth thesis that relies on the company steadily boosting the value of its platform for users.
An additional metric adds weight to this bullish thesis. Shopify's attach rate, which management uses to describe the rate at which existing customers choose to spend more for extra services, hit a new high in early 2023. "Merchants continue to buy more and more solutions from us," CFO Jeff Hoffmeister told investors last month.
Price and value
As you might expect, investors are being asked to pay a higher premium for that operating performance. Shopify shares are priced at over 13 times annual sales, up from around 8 at the beginning of the year. For context, you can own Microsoft stock for about 12 times sales. That business is far larger and far more profitable, and also has an attractive growth profile in areas like cloud services and cybersecurity.
MSFT PS Ratio data by YCharts
The higher valuation raises the risk of weak returns from owning Shopify stock in the short term, especially if the company struggles to improve its market share position. That metric currently sits at about 10% of e-commerce sales in the U.S. geography, but shareholders need to see it rise over the next few years even as Shopify handles more offline commerce.
On the bright side, Shopify has made several changes in recent quarters that suggest the company will do more than just return to its prior modest levels of profitability. Higher merchant fees are one example, and so is the splitting off of its logistics business. It's conceivable that these moves will pair with strong growth to push gross profit margin back toward the high 50% rate that investors saw during that pandemic.
In that bullish scenario, Shopify's annual earnings could be much higher than even the rate that investors saw during the high-growth phase of the pandemic. Yet it might make more sense to watch for concrete signs of a profit rebound before jumping into the stock today. Shopify is on the right path, pairing cost cuts with accelerating growth. But management still has work to do to build a sustainably strong business.
