While many growth stocks have fallen hard in the recent market pullback, Shopify (SHOP 1.44%) is not one of them. The e-commerce platform is up about 50% so far in 2023, roughly doubling the return of the Nasdaq Composite to date.

That rally could be just the start, assuming Wall Street is correct about the company's long growth runway and its ability to boost margins over time. It's also possible that shareholders will see lackluster returns from here if it doesn't live up to those high expectations.

Which reading is closer to the truth for this growth stock? Let's dive right in.

Reasons to worry

There are some good reasons to be cautious about the stock right now. Shopify, which helps merchants conduct business online and in person, is far from generating positive earnings, for example. Net losses are $1.2 billion through the first half of 2023 compared to $2.9 billion of losses a year earlier.

Yet, it makes more sense to look at adjusted operating profit in this case, which strips out the impact of the one-time charges it took this year related to its restructuring and the sale of its logistics business. On that basis, operating income was 9% of revenue in the second quarter compared to a loss of 3% a year ago.

Still, investors can find much stronger annual profits at this price. Shopify is valued at 11 times annual earnings, or about the same valuation as Microsoft, which routinely delivers over 40% operating profit margin. Bears will stress that Shopify's current losses and unproven earnings power make it too expensive following the rally in 2023.

There's an operating challenge, too. Much of Shopify's growth today is coming from places like payments processing and merchant solutions. These are lower-margin revenue streams that are pushing gross profit lower. It's unclear, then, whether Shopify can significantly boost profitability even following its exit from the costly fulfilment business.

The bullish reading

Growth investors have many reasons to like this stock as well. Let's start with revenue growth, which accelerated to a 31% rate in the most recent quarter from 25% in the first quarter. Those gains reflect an expanding market share that's already significant.

Shopify accounted for about 10% of all e-commerce transactions in the U.S. in late 2022, and management sees room to steadily boost that figure over time. The integration of artificial intelligence is helping make the platform more valuable to merchants through its shopping and commerce assistants, for example.

And cash-flow trends suggest that it won't be long before Shopify breaks into positive annual earnings. The company just concluded its third consecutive quarter of positive cash flow, with cash production landing at 6% of revenue in the second quarter compared to a 7% burn a year earlier. Management is projecting further gains ahead as the company capitalizes on the sale of its expensive logistics arm.

That stock price premium doesn't look so steep in the context of accelerating growth and improving profit margins. The average Wall Street analyst is expecting revenue to rise 24% this year compared to Microsoft's projected 11% increase.

It's a lot less clear where Shopify's profitability will land over the long term. However, it's good news for the business that it is adding so much scale, both in terms of its merchant pool and its portfolio of services. These wins will make it easier to continue boosting cash flow, and eventually earnings.

Cautious investors might want to simply watch this stock until more-concrete signs develop on Shopify's earnings power. But you'll likely see the best returns from holding shares through the volatility this year while focusing on the growth stock's multi-year transformation strategy.