Shopify's (SHOP +2.65%) outstanding run on the stock market in 2023 came to a screeching halt after the company released its second-quarter 2023 results on Aug. 2. Shares of the Canadian e-commerce platform provider were down 5% in a single session following the release of its results, and it is worth noting that the stock has lost more than 16% of its value in August already.
Investors who bought Shopify at the end of last year saw their investments nearly double in early July, but the fast-growing tech company has lost its wheels of late.
The stock is still up 62% year to date, but its latest pullback and weak Wall Street sentiment mean that savvy investors now have an opportunity to buy it at a relatively attractive valuation. Let's see why you may not want to miss this chance.
NASDAQ: SHOP
Key Data Points
Growth investors are getting a relatively good deal
While Shopify stock remains expensive at 11.7 times sales, its latest pullback means that it's trading at a significant discount to its five-year average price-to-sales ratio of almost 30. Also, the August sell-off brought down Shopify's sales multiple.
SHOP PS Ratio data by YCharts
A closer look at the company's results shows why that's the case. Shopify's second-quarter revenue increased 31% year over year to $1.7 billion, which was ahead of the $1.63 billion Wall Street forecast. Its Q2 growth accelerated compared to the 25% year-over-year revenue jump it delivered in the first quarter of 2023.
What's more, the company posted a non-GAAP (generally accepted accounting principles) profit of $0.14 per share, compared to a loss of $0.03 per share in the year-ago quarter, beating the consensus estimate of $0.06 per share.
Shopify's guidance complemented its solid results. It expects Q3 revenue to increase by a low-20s percentage compared to the year-ago period. After adjusting for the sale of its logistics business, the year-over-year growth would land in the mid-20s percentage. Shopify points out that the sale of its logistics business will create a headwind of 300 to 400 basis points. It also expects a jump to 2 to 3 percentage points in the gross margin in the current quarter from the Q2 reading of 49.3%.
Analysts would have settled for 17% year-over-year revenue growth from Shopify in Q3. So, Shopify not only exceeded the market's expectations, but it also guided for stronger-than-expected growth. But concerns about the company's long-term growth roadmap amid stiff competition in the e-commerce space led to weakening Wall Street sentiment.
However, investors would do well to look at the bigger picture. Shopify is growing at a faster pace than the e-commerce market, which isn't surprising as it enables merchants to bring and operate their businesses online.
Why Shopify's business is built for long-term growth
The global e-commerce market is expected to grow by nearly 9% in 2023, according to eMarketer. Shopify's growth rate so far in 2023 and for the current quarter suggests that it is on track to grow at a faster pace than the end market.
Analysts are expecting the company to finish the year with a 24% increase in revenue to $6.9 billion, which would be greater than the 21% revenue growth it clocked in 2022.
SHOP Revenue Estimates for Current Fiscal Year data by YCharts
The chart above suggests that Shopify is expected to sustain impressive revenue growth for the next couple of years as well. With the global e-commerce market expected to grow, it is evident that Shopify is set to outperform the industry it operates in. That's not surprising, as Shopify's tools play an important role in the proliferation of e-commerce.
Its e-commerce platform enables merchants to build and customize their online stores and sell across multiple channels, such as various online marketplaces, social media, and even physical stores. What's more, merchants can use Shopify to sell their products in international markets. The company also provides products to merchants to collect payments, helps them with advertising, and gives them access to capital.
Not surprisingly, Shopify customers have increased their adoption of the company's services over time. For instance, Shopify's customer cohort at the beginning of 2015 increased its spending on the company's platform by 3.4 times. The customer cohort at the beginning of 2019 increased its spending by 1.5 times.
Shopify is witnessing an increase in the number of merchants on its platform and seeing them adopt more of its solutions, which is leading to an improvement in the product-attach rate. As a result, the company's gross merchant value jumped 17% year over year in the second quarter to $55 billion.
Also, the company's revenue from the merchants services business was up 35% year over year last quarter to $1.3 billion, driven by the increasing adoption of its payments products. Given that Shopify estimates a total addressable market worth $160 billion, it is at the beginning of a solid long-term growth curve. This explains why analysts are expecting a nice acceleration in the company's bottom-line growth.
SHOP EPS Estimates for Current Fiscal Year data by YCharts
In the end, Shopify could continue to deliver impressive levels of revenue and earnings growth in the long run given the lucrative revenue opportunity it is sitting on. Also, the fact that it is growing at a faster pace than the e-commerce market points toward market-share gains. That's why investors would do well to take advantage of the recent pullback in Shopify and buy this growth stock while it is down.
