With the Nasdaq Composite index up 36% in 2023 (as of Nov. 28), bullish sentiment appears to have taken over Wall Street. Some growth tech stocks, though, have fared even better.
Take a look at Shopify (SHOP 4.37%). The e-commerce infrastructure service provider has seen its shares skyrocket 112% this year. That gain has been bolstered by strong fundamental performance.
While the Nasdaq might be in bull market territory, Shopify is doing even better. Here are three reasons investors might want to buy the stock right now.
Exceeding expectations
Shopify impressed Wall Street with its third-quarter financial results. The stock has climbed 24% since they were released.
The company reported gross merchandise volume and revenue growth of 22% and 25%, respectively, versus the year-ago period, beating analysts' consensus expectations.
It wasn't all just about the top line. Shopify booked an operating income of $122 million in the quarter, compared to an operating loss of $346 million in Q3 2022. Expenses in all the major categories, including sales and marketing, research and development, and general and administrative, were down.
The company laid off 20% of its employees earlier this year and put a greater focus on operational efficiency. Now, its bottom line is starting to benefit.
For the current quarter, management expects revenue to grow by a percentage in the high teens.
"As we look forward to the busiest shopping season of the year, we're confident that our unified commerce platform empowers our merchants with the tools they need to seize every opportunity and achieve greater success," Shopify President Harley Finkelstein said.
Shopify is certainly benefiting from strong momentum, something investors can appreciate.
NASDAQ: SHOP
Key Data Points
Mission-critical partner
Shopify's platform and services allow merchants to quickly and seamlessly set up online shops and start generating revenue. Its service offerings include payment processing, invoicing, marketing, shipping, and branding. Customers also have access to an app store with offerings from third-party developers. Plus, there are AI features to help merchants with various tasks.
It's easy to see how the company has become a mission-critical service provider for its more than 2 million clients. Without Shopify and its integrated solutions, these merchants would likely have to piece together services from different providers.
From Shopify's perspective, this means that its competitive position benefits from switching costs. Merchants will think twice before leaving it for a rival and taking the risk of disruptions to their operations. This gives Shopify an economic moat.
Below-average valuation
Even after the stock's impressive rise in 2023, shares are trading well below their average historical valuation. Since it went public, Shopify's price-to-sales (P/S) multiple has averaged 22.8. Right now, the stock trades at a P/S ratio of 14.3. This could give some investors who are on the fence a nudge to consider buying shares.
But to be clear, while its current valuation is below its historical average, investors need to consider the context. In 2020, thanks to heightened market enthusiasm, Shopify was trading at a P/S ratio of more than 60. It's probably safe to bet that this won't happen again. Of course, the current valuation should be well below the average that this lofty mark helped to push up.
Investors should buy this stock only if they believe the business can continue its rapid growth in the decade ahead. Otherwise, that valuation could prove to be a headwind.
On a positive note, the fact that Shopify continues to register outstanding gains in the current macroeconomic environment should give investors confidence. Once things start to improve, the business's growth could begin to accelerate.
