Wall Street isn't as enamored with Shopify (SHOP 0.87%) stock these days. The e-commerce infrastructure specialist jumped over 100% last year, but shares are down 11% in 2024 while the S&P 500 is up by 8%.
That weak performance doesn't make much sense considering all the good news the company recently revealed about its operating trends. Let's take a closer look at whether that makes the stock a good buy right now, or if investors should wait for an even better price before purchasing shares.
The growth potential of Shopify
Shopify is a leading e-commerce infrastructure provider, with services covering nearly all aspects of the selling process from marketing to payments processing. It helps merchants with in-person transactions as well through a convenient point-of-sale system. Millions of small businesses rely on the Shopify platform, in addition to large global brands like Nike Strength, Dollar Shave Club, and Billabong. Shopify handles roughly 10% of all e-commerce transactions in the United States.
These merchants are clearly getting value out of Shopify's software and hardware. Sales volumes accelerated throughout the year in 2023 and landed at 23% year-over-year growth in the most recent quarter. Combined with rising prices and higher subscription income, these gains allowed revenue to soar by 30% after accounting for the sale of its logistics division. "2024 was an incredible year for both Shopify and our merchants," Shopify president Harley Finkelstein said in a press release. Most Wall Street pros are expecting more good news ahead, with sales likely to rise by more than 20% in 2024 and 2025.
Shopify is logging some financial wins
Shopify is further along in its cost-cutting program than industry peers like Etsy, giving investors confidence about seeing excellent returns ahead. It already completed the sale of its costly logistics business, which has had an immediate impact on earnings and cash flow. Shopify's profit broke back into positive territory last quarter and cash flow improved to 13% of sales from 3% of sales in 2022.
SHOP Operating Margin (TTM) data by YCharts
The stock's path from here will probably depend on whether Shopify can maintain that positive financial momentum. Executives are projecting a volatile year ahead for cash production, but with generally improving results throughout 2024. Sales trends should be fantastic, meanwhile, as revenue rises by at least 20% year over year in Q1.
The artificial intelligence (AI) boom has the potential to lift demand in the coming quarters, too, as the tech is making its way into more of Shopify's workflows. The company just launched an AI-powered shopping assistant, for example, while a new feature called Sidekick uses AI to cut out many repetitive tasks for merchants. Look for much more action in this space in 2024 and 2025 as Shopify seeks to capitalize on the excitement around AI.
Shopify stock saw a price cut
The stock is cheaper than it has been, but you're still paying a premium to own this growing business. Shares are trading for 13 times revenue today, down from a P/S ratio of closer to 16 at the start of the year.
Shopify can earn that premium if the business continues to grow at an over 20% annual rate while demonstrating sustainable profitability. It's that last piece that's missing so far from this growth story, though. As a result, cautious investors might want to watch the stock for now until Shopify can put together a few consecutive quarters of positive earnings.
If you don't mind volatility, though, you're likely to be happy you put this growth stock in your portfolio at a time when Wall Street is more focused on larger software-as-a-service giants.
