Shopify (TSX:SHOP): Is It a Buy in This Stock Market Rally?

If it delivers solid Q1 earnings, Shopify Inc (TSX:SHOP)(NYSE:SHOP) stock could be a good buy in the current stock market rally.

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In the recent stock market rally, few TSX stocks have fared as well as Shopify Inc (TSX:SHOP)(NYSE:SHOP). Rocketing all the way to $908, it’s not only bounced back, but has also reached new highs. While brick and mortar stores remain closed due to COVID-19, e-commerce companies are doing more business than ever. Shopify, which provides a platform for such businesses, is reaping the rewards.

In its most recent quarter, Shopify smashed earnings guidance and soared on red-hot growth metrics. We still have to wait a while to see whether Q1 will be as good as Q4. If it is, this soaring stock could go even higher.

Shopify suspends outlook

Before getting into the bullish case for Shopify, we should get one major negative out of the way:

The company recently suspended its earnings outlook for 2020, citing the unprecedented times in which we’re living.

The move shocked many, as SHOP seemed like the type of business that would thrive in today’s economy. As mentioned, e-commerce actually benefits from the closure of retail businesses. Shopify earns money from e-commerce transactions, so it stands to reason that it would profit from their growth.

If anything, you’d expect the company to beat guidance, yet it suspended its outlook all the same. Investors got spooked, which briefly sent the stock tanking.

It’s beginning to look like that was a mistake, however. When a company suspends its financial outlook, that usually means it will fail to meet it. However, it doesn’t necessarily have to mean that. It could simply mean that the company is unable to predict how it will perform in a given period.

It could even mean that the company is expecting to outperform, although that’s rarely the case, as executives usually consider positive surprises a good thing.

In any case, Shopify’s COVID-19 press release didn’t say that the company expected to under-perform. In fact, it hinted that e-commerce sales from retail businesses were up. It’s quite possible that Shopify’s Q1 earnings will actually beat expectations. We’ll have to wait until May 6 to find out, but there have been plenty of encouraging signs.

SHOP’s fundamentals

Overall, Shopify’s fundamentals indicate a solid growth stock with a lot of momentum.

In its most recent quarter, the company saw its revenue increase by 47% year over year, driven by particularly strong growth in merchant solutions, which grew by 53%.

In the same quarter, the company delivered positive GAAP earnings of $800 million or $0.01 per share. Adjusted earnings were $0.27 per share. Of course, with SHOP trading at $908, that makes the stock unbelievably expensive.

However, fast-growing companies can trade at nosebleed valuations for prolonged periods. Amazon, for example, has always been fairly expensive compared to earnings.

Investors expect strong growth from the company, so they’re willing to pay a premium. The same appears to be true with Shopify, a much younger company with more room to grow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Shopify, and Shopify and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.

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