Shopify (SHOP 1.27%) just reported its second-quarter earnings, bringing primarily good news to the company. But the report did not excite investors, and the stock fell by more than 5% in the following trading session.
Nonetheless, this e-commerce platform, which helps companies build an online presence, continues to speed ahead. As more and more product sales move online, the opportunity to capture prospective merchants should bode well for both Shopify and its investors.
Let's look at three specific reasons to be bullish about the company right now.
No. 1: Continued improvement in the financials
Perhaps the most irrefutable reason for Shopify's success is its revenue growth. In the first two quarters of 2023, it came in at just over $3.2 billion, rising 28% compared with the first half of 2022.
Grand View Research forecasts a compound annual growth rate (CAGR) for e-commerce of 15% through 2027. Hence, it grows faster than industry averages, capturing more of the market.
Admittedly, the stock has struggled in recent quarters as it attempted to build a fulfillment network. But over time, as costs mounted and the path to profitability became unclear, Shopify reversed course and sold this business segment.
The company's bottom-line results continue land in the red as it deals with charges related to this sale. Still, the $1.2 billion loss for the first half of 2023 fell from $2.7 billion in the first half of 2022. Also, when removing such one-time charges, Shopify earned an adjusted $190 million net income during the year's first half.
No. 2: The Shopify ecosystem
Despite selling the logistics network, Shopify has built an extensive e-commerce ecosystem. First, it offers a site that is easy to set up, customize, and operate. Since users do not have to rely as heavily on developers, the functionality makes it easier for merchants to choose Shopify over competitors.
Second, it has built an ecosystem offering ancillary services. These go beyond the simple setup and operations of an e-commerce site and support the e-commerce businesses. Among the more significant of these services is Shopify Payments. Through this system, merchants can set up all major forms of payment without dealing with a third-party payment provider.
Additionally, merchants can market their business through Shopify. This includes customer outreach through chat or email, social media integrations, and putting data to work to discover insights about customers.
Shopify can also help with many business management functions. These include tracking sales (both online and offline), ordering inventory, and securing business funding through Shopify Capital. Such functionality gives merchants an extra incentive to choose Shopify, as most of the software companies it competes with will not match these services.
No. 3: An attractive valuation
These advantages likely contributed to a rising sales multiple, and admittedly, some investors will not agree with labeling Shopify's valuation as an advantage. The current price-to-sales (P/S) ratio of close to 13 does not appear cheap on the surface, especially when such competitors as Wix, Squarespace, and Amazon sell for five times sales or less.
However, Shopify is inexpensive by historical standards. And between the middle of 2019 and early 2022, the P/S ratio stayed above 20 and occasionally reached into the stratosphere above 60.
SHOP PS Ratio data by YCharts
Investors should not expect it to reach those levels again anytime soon. Nonetheless, if history is an indication, continued revenue growth and a likely return to profitability could bring about further multiple expansions, making it premature to call Shopify an "expensive" stock.
Consider Shopify
At this stage, investors should consider adding Shopify shares. Revenue continues to grow rapidly, and with the sale of the fulfillment network, profitability is within reach.
Moreover, Shopify's ease of use and extensive ecosystem provide a competitive advantage, and the stock is at a low price-to-sales multiple by historical standards. All these factors work to the benefit of the top e-commerce company's investors.
