Investors had high expectations heading into Shopify's (SHOP +3.94%) fourth-quarter earnings update. They weren't disappointed. In mid-February, the e-commerce infrastructure specialist reported faster sales growth, surging cash flow, and a return to profitability in late 2023 following a tough run of losses through most of the last two years.
There's even better news around Shopify's bright outlook for the year ahead. Let's look at that forecast, and why it might make this stock a great buy for growth investors.
NASDAQ: SHOP
Key Data Points
Closing out strong
Shopify ended a good year on a very positive note. Transactions across its platform accelerated for a fourth consecutive quarter, improving to a 30% increase after adjusting for the sale of its logistics business.
That was enough to make the business stand out against most rivals in both the e-commerce and traditional retailing spaces. The growth likely translated into solid market share gains compared to companies like eBay and Etsy, which reported flat or declining transaction volumes for the year. "2023 was an incredible year for both Shopify and our merchants," President Harley Finkelstein said in a press release.
Merchant wins
Strong engagement among its merchants lifted the business in some key ways beyond just overall sales growth. Shopify notched gains in its subscription and recurring revenue segments thanks to a combination of higher prices and rising demand for its services. Some recent additions to this portfolio include new payment processing tools and an artificial intelligence (AI) suite called Shopify Magic. "Our focus remains on driving innovation in an ever-evolving commerce landscape," Finkelstein said.
It's not clear yet just how much of an impact AI will have on Shopify's business. But management is busy incorporating the tech through most of its portfolio. The real test will be whether AI boosts the value of the platform for its merchants. The best way to judge success here will be following subscription revenue and pricing trends over time.
The 2024 forecast
Finkelstein and his team are expecting this positive momentum to continue into 2024. Sales are likely to rise at a near-30% rate in Q1 after adjusting for the sale of the logistics arm, they project. Most Wall Street pros are looking for reported sales to rise by over 20% in 2024 after jumping 26% last year.
The big question going forward is whether Shopify can build a sustainably profitable business from all this success around growth. Operating earnings were positive last quarter, but the company reported expanding losses for the full year. That's not a great sign for a business that's trading at an elevated premium of over 14 times sales.
Yet the more instructive metric to watch here is free cash flow, which jumped to over 20% of sales last quarter. Management is aiming to keep that figure in solidly positive territory from here on out. And, due to its software-as-a-service selling approach, cash flow is a strong indicator of its earnings power over time.
Look for profits to expand quickly in 2024 thanks to a combination of robust growth and improving margins. Wins there could help this rallying stock continue delivering excellent returns for its shareholders over the long term.
