The market is making a comeback in 2023, and the S&P 500 is up 15% year to date. Many companies are demonstrating more resilience than investors thought, with a slew of good news this earnings season.
Shopify (SHOP +0.70%) stock is helping to lead the charge. This e-commerce platform is demonstrating many of the qualities investors love in a stock: high growth, improving profits, and innovation.
If you buy Shopify stock now though, you would want to know about its prospects more than a few months down the line. Let's see where it could be in three years and whether or not now is a good time to buy shares.
Continually improving its e-commerce platform
Shopify operates one of the largest e-commerce platforms in the world, making it easy for any type of business, large or small, to get online quickly. Its simple and broad solutions cover most business needs, and millions of clients use its packages for full-service websites and single services like checkout or cross-border payments.
Many of its services are recent developments that have sprung out of a desire to meet clients' varying needs. A new component called Shopify Magic is a generative artificial intelligence (AI) solution that can write marketing copy and generate branding campaigns based on specific company data, using the brand's own voice and tone.
Another new option is a one-page checkout that makes it easier to complete a purchase and drive conversion rates. Management says that clients who use the single-page checkout are seeing the checkout process speed up by four seconds, on average. That might not sound like a lot, but when it comes to online shopping, it is.
NASDAQ: SHOP
Key Data Points
The pivot to single services is attracting larger enterprise customers that don't need a turnkey e-commerce package but are often looking for better options for specific services. These large customers are revenue drivers that are helping Shopify scale and bringing it closer to profitability.
Revenue increased 25% year over year in the 2023 third quarter, which is a slowdown from previous quarters but strong as compared with the overall retail and e-commerce market. The gross margin widened from 48.5% to 52.6% driven by the sale of its logistics business and leading to positive operating income of $122 million after a $346 million operating loss last year.
What the future holds
Shopify stock surged early in the pandemic when e-commerce adoption accelerated, but the business slowed as people went back to physical stores. Things are picking up again, and Shopify is poised to benefit from the rebound as customers integrate their digital and brick-and-mortar shopping experiences.
The company's focus on its own integration of e-commerce services with storefront services brings it up to date with current trends. For example, it recently launched a new package called the retail plan, which provides all of its point-of-sale service for physical stores with a simple way to go online.
It continues to bring out new packages and services to harness current trends and help merchants get ready for the future. Shopify is now ramping up its exciting Buy With Prime partnership that lets Amazon Prime members use and benefit from checking out with their Prime accounts.
Over the next three years, Shopify should keep introducing services to meet customer needs as well as capture new clients and develop mutually beneficial partnerships with like-minded companies. Scaling should lead to wider margins and trickle down to profits, and if it can stay efficient while landing larger clients and expanding into new markets, Shopify is likely to be reporting net profits within the next few quarters.
Can Shopify shares rise over the next three years?
Based on everything above, Shopify looks like a no-brainer stock to buy. It's firing on all cylinders, moving toward profitability, and has tons of future potential.
The only thing holding me back from saying to grab shares is valuation. Shopify stock is expensive, trading at 12 times trailing-12-month sales. That already factors in a lot of sales growth. Some stocks come with a premium because they offer so much. Stocks like Amazon and Costco Wholesale are always more expensive than similar stocks. Shopify has also always sported a rich price tag.
However, that premium looks higher than I think is justified, and the stock looks susceptible to declines from any negative updates. It's actually still down 34% over the past three years since it couldn't sustain the high growth rates and profits it was reporting at the time.
Putting this all together, I would advise potential investors to wait for a dip and a more attractive entry point before buying shares.
