Shopify (SHOP +0.15%) investors are partying like it's early 2022. The e-commerce platform stock recently crossed $80 per share to set a new post-pandemic peak. Shopify's all-time high was $153 in late 2021, but shares dropped as low as $43 in the subsequent slump.
Still, the rally over the past year raises the risk that investors will pay too high of a price for Shopify if its sales and earnings trends disappoint. Let's take a closer look at the prospects for this volatile growth stock.
The latest results
There's no mystery around why shares have jumped in recent months. Sure, the bigger picture involves a rallying Nasdaq Composite index that pushed many tech stocks higher in 2023. But Shopify has also done plenty to boost Wall Street's optimism about the business.
NASDAQ: SHOP
Key Data Points
Start with sales growth, which in the past year accelerated back above 20% to put an end to the pandemic growth hangover that stung the company through late 2022. Investors have been thrilled to see these sales gains being powered by higher merchandise volumes and by increased uptake for Shopify's expanding portfolio of merchant services.
Shopify paired that rising revenue with aggressive cost cuts, including the exit of its costly logistics business. These moves helped push gross profit 36% higher last quarter, lifting gross profit margin up to 53% of sales from 48% a year ago.
Buy for cash flow
If cash flow is destiny, as the Wall Street adage goes, then Shopify has a bright future. The company achieved positive cash flow for four consecutive quarters and is now within striking distance of its all-time high result on this score.
SHOP Free Cash Flow data by YCharts
There's room for more improvement in the next few years as well. Shopify's cash flow margin (free cash flow as a percentage of sales) is a decent 16% today. But other marketplace giants like eBay routinely reach 30% or more. Shopify's executive team is aiming to keep boosting this metric in the quarters and years to come.
"We will continue to operate with discipline," CFO Jeff Hoffmeister told investors in early November.
Watch for margins
Shareholders will receive much more information about those sales and earnings trends when Shopify announces its Q4 results in mid-February. That update will likely include an official outlook for 2024 as well.
Heading into that report, most Wall Street pros are looking for Shopify's sales growth to land at about 20% this year compared to a projected 25% increase for the full 2023 year. Earnings should expand faster thanks to that declining cost burden.
Shares are priced as if Shopify will not only continue growing quickly, but will also meaningfully boost its profit margin. You'd have to pay 16 times sales for this business, which is expensive compared to other options in the space. Etsy is priced at about 8 times annual sales, for example, and eBay is valued at just 2.2 times sales.
For Shopify to earn that growth stock premium, it will need to expand its operating profit margin closer to eBay's 21% rate over the coming quarters. Signs of this progress in the company's upcoming earnings report will be the surest path toward continued market-beating returns for Shopify stock in 2024.
