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Why Is Shopify Inc. up Over 20% in the Past Week?

After falling over 50% from its highs set in 2015, shares of Shopify Inc. (TSX:SH)(NYSE:SHOP) are staging what looks to be a meaningful rebound. Why the resurgence after nearly five straight months of declines?

Image Source: YCharts

Image source: YCharts

Things just aren’t that bad

A big reason for the decline isn’t poor performance, but rather a reset in expectations. As you can see below, investors have dropped the stock’s valuation from roughly 15 times sales to a low of 8.5 times sales over the past year. The underlying fundamentals, however, remain quite strong, despite slowing top-line growth.

Sales for 2015 are expected to grow by 86%. While this is slower than both 2014 (109%) and 2013 (112%), there’s no doubt that Shopify is still finding a huge market to sell into. The company estimates there are over 42 million small/medium merchants globally that could use its products.

More importantly, the ease of Shopify’s services means that it’s likely growing the market by bringing new merchants online. Growing the market while taking an increasing amount of the share is a formula for long-term success.

Importantly, expectations have come down far enough that they will be very achievable. Analysts are projecting 60% sales growth for 2016 and only 37% in 2017. This is still market beating growth, but it’s considerably less than what Shopify has proven it’s capable of doing in the past.

Image Source: YCharts

Image source: YCharts

There is also proof that Shopify is managing its growth transition well. The easiest way to generate profits for a company with Shopify’s business model is by maintaining a stagnant cost base while scaling revenues. On this front, Shopify is doing extremely well.

Operating costs have decreased as a percentage of revenue every year since 2012. Most importantly, management has been able to leverage its sales and marketing budget, which have comprised the bulk of cost savings. As the business grows, the company can likely start to scale down research and development costs, especially considering it has already built four different subscription platforms.

Image Source: Shopify Corporate Presentation

Image source: Shopify corporate presentation

Is it too late to buy?

It’s safe to say that at $26, Shopify shares were too cheap. After popping to $36 in recent weeks, is it too late to get in?

Pacific Crest Securities doesn’t seem to think so. On Tuesday the research firm upgraded shares to “overweight.” Recently released company guidance proves that this bullish stance may be warranted. First-quarter revenues are expected to be between $65 and $67 million versus previous estimates of only $62 million. Full-year 2016 revenues are now expected to be between $320 and $330 million versus expectations of $287 million.

Clearly, Shopify is still able to grow at fairly impressive rates, even if its sky-high historical growth rates make the business appear to be slowing.

With plenty of market share left to take and a valuation that’s still down over 30% from a year ago, Shopify shares are worth considering for any growth investor.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

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