Shopify (SHOP 1.11%) stock gained 124% in 2023, but even at the current price, it remains 54% off of its all-time highs. The e-commerce superstar is reporting high growth and improving profitability. Is it too late to buy, or can it soar higher in 2024?
Internal and external tailwinds
Shopify has carved out a wide niche as a leading business-to-business e-commerce platform. It only places fourth globally, but it has a strong lead in the U.S. market, with nearly a third of total market share.
Image source: Statista.
Shopify continues to report double-digit sales growth, with a 25% increase year over year in the 2023 third quarter, and there are many reasons to expect that to continue. E-commerce is expected to grow at a faster pace than overall retail over the next few years.
Shoppers took a break from e-commerce when they could leave their homes again, but they're back to taking advantage of the ease and capabilities of omnichannel shopping. E-commerce sales are expected to increase at a compound annual growth rate of 9.8% through 2028, with user penetration rising from 53.9% today to 63.2% in four years. With more than 2 million merchant clients and growing, Shopify is well-positioned to benefit from these trends.
Easing inflation should add to this as well. Although the Federal Reserve was more pessimistic with its latest update, saying interest rate cuts might not happen as quickly as investors would like to see, it's still forecasting cuts this year. More people spending means more people spending online, and for larger, more expensive items that they've been holding back on over the past two years or so.
Finally, Shopify is expanding its business to meet more needs and capture market share in a wide range of services. It has monthly recurring revenue from subscriptions, but the bulk of its revenue -- about 70% -- comes from merchant solutions. These include payment processing services, payment terminals, and similar tools.
Shopify can also offer solutions to merchants that are not on subscription plans, and it is building up a list of enterprise customers who rely on Shopify for some of its solutions and not for entire websites. Some recent examples include Toms shoes and London-based Ted Baker. That adds a growing and lucrative market.
Cost-cutting and profitability
Shopify's sales and profits soared early in the pandemic, and the company built up its infrastructure -- only to find demand fading. But it quickly moved to close out what it didn't need anymore, selling off a newly acquired logistics business and slashing worker count. Management is partnering with the company that acquired its logistics network, Flexport, to still be able to provide efficient delivery services for clients. Stay tuned to hear more about how that's going to play out.
Plus,s Shopify achieved an operating and net profit in the 2023 third quarter. As sales continue to increase and Shopify keeps a good grip on spending, it should be able to deliver higher profits. It has also generated positive free cash flow for four consecutive quarters with a cash-flow margin of 16% in the third quarter.
A premium valuation could keep the stock down
At the current price, Shopify stock trades at a price-to-sales ratio of 15, which is a high valuation. If it can keep up sales growth, that might be justified. The average Wall Street consensus is for sales to increase 20% in 2023 and 18% in 2024. But many similar or faster-growing companies trade at much lower valuations.
If you have a high risk tolerance, you might be interested in taking a position in Shopify stock right now. The long-term outlook appears strong, but at this price, you might not see high gains in the near term.
