With stock indexes up sharply from their lows (yet still below their all-time highs), many investors believe the next bull market may have already started. Wall Street is excited by the diminishing prospects of a hard recession this year, and some growth stocks have responded by soaring through the first half of 2023.
Shopify (SHOP -1.81%) fits into that category. The e-commerce platform's stock has roughly doubled since early January, compared to a 35% spike in the Nasdaq Composite Index. But investors could still see long-term returns from buying this market-beating stock now. Let's take a look at a few reasons why.
1. Commerce everywhere
Like all of its peers, Shopify endured a growth hangover in the second half of 2022. But demand trends have stabilized and appear to be on the upswing.
Gross merchandise volume in Q1 was up 18% on a constant-currency basis, compared to 16% for full-year 2022. Overall revenue jumped 27%, thanks to high demand for subscription services and payment processing.
The business is winning in both the e-commerce and physical retailing channels, too, implying there's a long runway for growth ahead. Shopify can build on its roughly 10% market share in the U.S., for example, while using its point-of-sale system to account for more in-person transactions.
"Shopify's strong first quarter results demonstrate once again that we're the go-to solution powering businesses of all sizes, on every surface where they sell," Shopify President Harley Finkelstein said in an early May press release.
2. Rising margins
Wall Street is excited about Shopify's potential to boost profit margins over time. Much of that rebound will be driven by factors like the end to the pandemic-related growth hangover and the aggressive cost cuts that management has been rolling out over the last few quarters.
The bulk of these expense reductions will come from the sale of its logistics business to Flexport, a move that should make Shopify a more efficient business overall. The logistics niche is extremely capital-intensive, compared to the company's core marketplace platform, after all. It was a complex distraction from the main business, too, so splitting it out will give management more flexibility to prioritize higher-return investments.
However, this profitability spike has yet to show up in the company's results. But investors should watch the trend in operating margin over the next year or so for signs the strategic shift is working.
3. The price is right
As you might expect, you'll have to pay a high premium to own an industry-leading stock like Shopify. The company is valued at nearly 15 times sales today, up from less than 8 times sales earlier this year.
That valuation is still far below the 60 times sales investors were paying for the stock at its peak. Sure, the company is currently unprofitable, and its growth rates have slowed as e-commerce demand trends reverted to more normal patterns, but the business features many of the key ingredients that apply to most successful growth stocks.
Shopify has a large market share in an industry that's set to expand for many more years. It has several growth avenues to target, including a bigger portfolio of merchant services.
There's also a good chance that profitability will be much higher in five years than it is today. Considering these factors, the stock looks attractive, even after its rally over the last several months.
