There were high expectations heading into Shopify's (SHOP 1.11%) Q4 earnings update, and the e-commerce platform specialist didn't disappoint. In mid-February, the company announced accelerating sales growth for the core holiday shopping period as transaction volumes jumped. Its merchants are increasingly opting to pay for more of its widening range of services, too, which is boosting both the top and bottom lines.
Investors have responded positively to all this news. Shopify's stock is up nearly 90% in the past year, easily beating the 22% increase in the S&P 500.
That higher premium might limit your returns from buying the stock today. However, there are some good reasons to remain optimistic about a Shopify investment. Let's take a closer look.
1. Transactions are strong
Shopify is in a class of its own when it comes to engagement on its platform. Sales volume was up 30% in the most recent quarter after adjusting for the sale of its logistics business. Marketplace giant eBay is growing at about a 3% rate, for comparison.
That's no fluke. Shopify is becoming a more valuable platform for its sellers, thanks to the combination of higher demand and a deepening portfolio of services. Some of these new services include efficient artificial intelligence (AI) tech, and others are simple improvements to areas like the checkout process.
"Our strong Q4 and annual results are a powerful testament to the progress we have made building fast, reliable, and unified software for merchants of all sizes," CEO Harley Finkelstein said in a press release.
Shopify is projecting another quarter of strong growth ahead with sales projected to rise more than 20% in Q1.
2. Cash is king
Shopify lost money on an annual basis last year, but its cash-flow trends tell a different story. Free cash flow jumped to $446 million in Q4, up from $90 million a year ago. That translates into an impressive free-cash-flow margin (cash as a percentage of sales) of 21%, compared to 16% in the prior quarter.
SHOP Free Cash Flow data by YCharts.
This success is great news for Shopify's finances for several reasons. The most direct one is that this improving cash flow should translate into sustainably positive annual earnings in 2024 and beyond. Management is forecasting that cash flow margin will land just below 20% of sales in Q1 and will improve with each subsequent quarter in 2024.
These resources also give management ample resources to direct toward growth initiatives, like generative artificial intelligence (AI). And they'll eventually fund direct returns like stock buybacks as the business matures.
3. Infrastructure margins
Shopify is specializing on the tech that connects millions of shoppers to all types of merchants, including some of the biggest sellers on the planet. That flexible approach gives Shopify more room to grow than marketplace peers like eBay. But the best reason to like the stock is the potential for expanding profit margins.
Selling subscription-based software can be lucrative, as evidenced by Adobe's over-30% profit margin. Yes, Shopify is just breaking back into positive territory on this key metric. But if it can steadily move toward the double digits, then the stock has a good chance to keep rewarding shareholders.
Some investors might prefer to watch Shopify for more concrete progress. If you're not opposed to the risk associated with that lack of clarity, though, this growth stock could be a positive long-term force in a diversified portfolio.
