The market spotlight has returned to Shopify (SHOP 2.63%) after its fourth quarter and 2024 earnings report. The e-commerce giant's figures highlighted a business that continues to expand at a brisk pace.
The challenge for investors is whether that makes Shopify a buy. The stock has risen significantly since bottoming out in October 2022, and with a rising valuation, can investors still profit from it, or should they stay on the sidelines?
Shopify's results
For 2024, Shopify reported revenue of almost $8.9 billion, a 26% increase from 2023. Both of its segments contributed to this, with its platform-driven subscription services segment rising 28% and its merchant-services business increasing revenue by 25%.
Moreover, in 2023, a $1.3 billion impairment charge wiped out nearly all of the company's profitability. This was not the case in 2024, when it reported just over $2 billion in net income. That was far above the $132 million profit in 2023.
The one area that may have disappointed investors slightly was its revenue outlook. The company projects growth at a "mid-twenties percentage rate," closely approximating the 2024 rate. Still, with revenue up 31% yearly in the fourth quarter amid the holiday rush, that forecast may have slightly dampened expectations.
Making sense of Shopify
Indeed, Shopify has emerged as the company that merchants tend to turn to when they want to sell goods outside Amazon's massive ecosystem. Grand View Research forecasts a 19% compound annual growth rate for this industry through 2030 in what has already become a $29 trillion market.
This growth should benefit Shopify since, according to e-commerce data collector Yaguara, the company holds a 10% market share globally and ranks fourth. In the U.S., its 29% market share makes it the country's most popular e-commerce software platform. The reason for these successes likely hinges on its ecosystem.
First is Shopify's site itself, which offers merchants a flexible, no-code development experience and the power of rapid transactions to help maximize sales. Second, the company offers multiple ancillary services that support merchants. These include help with email marketing, raising capital, managing inventory (including goods sold offline), and other functions.
Shopify's ecosystem growth may have gone too far when it tried to enter the logistics business in 2022. While it meant an increased competitive advantage, the expense of building the infrastructure and the resulting losses led management to sell this business in 2023, leading to the aforementioned impairment charge. With the sale of the logistics business, the company has returned to profitability while maintaining a notable competitive advantage.
However, these successes may force investors to approach Shopify stock with caution. With that return to profitability, it is up more than 350% since the stock bottomed out in October 2022. This includes a 35% rise over the last year.
NASDAQ: SHOP
Key Data Points
Consequently, the trailing price-to-earnings ratio (P/E) recently was 77. And with Shopify selling at a price-to-sales ratio (P/S) of 18, its lofty valuation metrics will likely affect how investors approach the stock.
Should I buy Shopify stock after earnings?
Ultimately, investors can still feel comfortable buying the stock but may want to approach it cautiously.
The stock is expensive, which adds to the risk. However, investors can mitigate that by adding shares slowly through dollar-cost averaging. That will allow them to benefit from the company's growth while freeing them to add shares faster should the stock fall in the near term.
Over the longer term, Shopify is in a strong position, both in the U.S. and abroad, to capitalize on continued industry growth. As more merchants look to sell online, profits should swell as it serves more of the lucrative, growing e-commerce market.
