Shopify Inc.: Is This Explosive Growth Stock Still a Buy?

Shopify Inc. (TSX:SHOP)(NYSE:SHOP) beat analysts’ revenue forecast on August 1 and added a record number of small-business clients.

Total revenue in the second quarter was US$151.7 million — a 75% increase from the comparable quarter in 2016, while gross profit grew 83% to US$86.8 million for the same period a year ago.

This stellar performance, which surpassed company’s own expectations, pushed its shares higher more than 9% the same day, bringing Shopify shares closer to the record high of $135.42.

After the eye-popping second-quarter results, the biggest questions in investors mind are these: Is Shopify still a buy after rising 117% this year? And will the company continue to produce these explosive growth numbers?

Let’s first try to understand what’s behind this excitement. Here are a few facts which explain the Shopify’s success story:

  • Shopify now powers 500,000 businesses in 175 countries. This number is 67% higher than the same period last year;
  • 74% annual growth of merchants on the Shopify platform since 2012;
  • Major brands like Budweiser and Tesla Inc. now use the Shopify platform.

Global growth

Before the second-quarter’s surprise earnings, some leading investment banks, including Goldman Sachs Group Inc., had downgraded Shopify from “Buy” to “Neutral” on concerns that the company is increasingly dependent on newer non-core products and markets for its future growth. According to Goldman Sachs, some downside risks to Shopify stock include a leveling off of growth from newer products.

But the second-quarter results blew away all these concerns, showing that the company’s business model remains very strong, and it’s got all the ingredients to become a global e-commerce powerhouse.

Merchant growth in the second quarter, for example, was global with a 56% increase in North America, 82% in Asia, 168% increase in South America, and 70% increase in Africa.

What’s next?

Shopify is not making a profit yet. Being in the super-growth cycle, it’s investing its cash back into the business. In the second quarter, the company’s net loss widened to US$14 million, or US$0.15 per share, from US$8.4 million, or US$0.10 per share, in the same period a year ago.

But what makes me really excited about Shopify is the stickiness of its business model. Once you’ve set up your e-commerce store on Shopify’s platform, it would be tough to move to another vendor. Shopify keeps small-business owners happy by providing hassle-free back-office support.

There’s no doubt that, trading at $127 a share, Shopify is an expensive stock. But I don’t think this great technology company will stop here as more retail spending shifts online from physical stores, and as the company adds new revenue-generating businesses.

If you understand the growth cycle of a technology company and believe in the power of Shopify’s platform, I don’t think you’ve missed the boat!

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Fool contributor Haris Anwar has no position in any stocks mentioned. David Gardner owns shares of Tesla. Tom Gardner owns shares of Shopify and Tesla. The Motley Fool owns shares of Shopify, SHOPIFY INC, and Tesla. Shopify and Tesla are recommendations of Stock Advisor Canada.

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