Shopify (SHOP 1.11%) investors are hoping for a sweet Valentine's Day present this year. The e-commerce platform provider is set to announce its Q4 results after the market closes on Feb. 13, likely making the next trading day a volatile one for the stock.
Expectations could hardly be higher for Shopify's business. Share prices have nearly doubled in the past 12 months on encouraging signs of accelerating sales trends and a shrinking expense burden. Wall Street is hoping that these factors will pave the way for an end to its recent net losses as profitability jumps in 2024 and beyond.
But are investors still getting a good deal by purchasing Shopify stock today? Let's take a closer look.
Shopify's latest results look impressive
Shopify entered the fourth quarter with enough positive momentum to justify that surging stock price. Revenue was up a healthy 25% year over year in Q3 thanks to excellent volume growth across its platform. These gains translated into rising market share compared to the flat or declining volume metrics that shareholders have seen at companies like eBay and Etsy through most of 2023.
Shopify's expansion is even more impressive considering that shoppers have been pulling back on spending at many previously popular e-commerce sites. "Our ability to help our merchants succeed in any economic environment ... has not only built trust with our merchants but has positioned Shopify for sustained growth and profitability for the future," executives said in an early November press release.
The kicker revolves around profitability
Sales growth alone isn't enough to sustain a stock's rise, though, so Shopify must show progress at boosting its earnings power as well. The early indications here are great. Following the company's aggressive cost-cutting program, which was headlined by the sale of its massive logistics arm, profitability is on the upswing. While Shopify is still losing money on a trailing-12-month basis, it generated profits in the most recent quarter and the company's operating margin is now sitting above its pre-pandemic level.
SHOP Operating Margin (TTM) data by YCharts
There's likely more good news ahead on this score, at least if cash flow trends are any indication. Shopify's cash flow jumped to nearly $300 million last quarter compared to an outflow of $150 million a year ago. Executives are aiming for more growth over the long term, likely lifting annual earnings in the process. Most Wall Street pros are looking for profits to improve to about $0.69 per share next year compared to a projected breakeven for 2023.
It isn't too late to buy Shopify stock
You might think you missed the best shareholder returns since this good news is now reflected in Shopify's stock price. Investors are paying close to 16 times annual sales for the business right now, up from around 10 times sales at several points in the past year. You can own more profitable, established tech giants like Amazon and Microsoft for less than that price. Purchasing these diversified winners wouldn't expose you to as much risk around falling sales during an economic downturn, either.
Yet Shopify has a brighter growth outlook coming from its smaller sales base. And its opportunities for growth are expanding at the same time. That's because of its widening service portfolio that now features more seller services like payment processing and back-office tasks like fulfillment and business loans. The power of Shopify's selling model is in being able to move merchants into more of these services over time.
The first step in that virtuous cycle is attracting more merchants and keeping them happily engaged. That's why sales volumes will be a critical metric to watch in February's financial update, as well as in Shopify's next few quarterly reports.
