Investors have some good reasons to believe that they've missed out on Shopify (SHOP 1.11%) stock. The e-commerce platform specialist's shares have more than doubled this year, easily outpacing the 37% rally in the Nasdaq Composite index.
Soaring gains like that increase the risk that optimism has gotten out of hand on Wall Street. Yet Shopify is doing its part to earn a higher premium through accelerating sales growth and increasing profitability. Here's why those gains might make the stock worth buying, even after its big rally in 2023.
More than a platform
It's clear from Shopify's latest earnings results that the company is cashing in on more than just rising e-commerce demand. Merchants are finding more value in its expanding suite of services, too.
That fact helps explain how Shopify boosted sales by a blistering 25% this past quarter while sales volumes were up by 22%, or $10 billion, year over year. Compare that volume growth to the 5% uptick that eBay posted, and you can see where Shopify is carving out a bigger piece of the e-commerce pie.
A large part of those sales gains are coming from new growth initiatives, such as payment processing and subscription solutions. That's great news for investors because it implies that Shopify isn't totally reliant on sales volumes. In the same way that Costco can earn steadier profits than rivals through its membership fees, Shopify is building a valuable stream of recurring revenue.
Follow the finances
The big question is how much stronger can Shopify's finances become? There are encouraging signs here, thanks to the combination of fast revenue growth, rising subscription service sales, and much lower costs. Shopify's exit from the logistics business alone promises to push profitability toward new highs.
SHOP Operating Margin (TTM) data by YCharts.
The stock won't earn its 2023 premium without sustainably higher operating profit margin. Shopify is still losing money on that basis, with trailing-12-month losses sitting at 8%. Microsoft is earning 43% profit, by comparison.
Yet last quarter, Shopify swung to a profit equaling 7% of sales, compared to a 25% loss a year earlier. Cash-flow rates are on a similar upswing, moving to a 16% gain in Q3, compared to an 11% loss last year. The path that these metrics take over the next few years will be the key factor in extending -- or reversing -- Shopify's 2023 stock-price rally.
Price check
There's no doubt that Shopify is an expensive stock here in late 2023. For a bit less than its current valuation of 14x annual sales, you can own Microsoft, a much more profitable business that's already entrenched in several high-growth industries.
Cautious investors might want to simply watch the stock, given all the enthusiasm that's baked into Shopify's premium. Even a modest operating stumble could spark a discount on the stock in the coming quarters.
On the other hand, Shopify is on track to produce much stronger earnings in 2024, even as it solidifies its market-share lead among a wide range of small, medium, and large merchants. The growth stock can continue rising, as long as it keeps fulfilling that mission.
