Canadian stocks have been extremely volatile this year. After starting the year with slightly more than 3% gains in Q1, TSX Composite tanked by 13.8% in the second quarter, as macro-level concerns weighed on investors’ sentiments. While the ongoing market turmoil is making investors nervous, it might be a rare opportunity for long-term investors to buy some quality stocks with outstanding fundamentals at a big bargain. Let’s take a closer look at one such badly beaten-down Canadian growth stock that has the potential to make you a millionaire in the long term if you act now.
Shopify stock continues to tank
Soon after its listing on the exchange in 2015, Shopify (TSX:SHOP)(NYSE:SHOP) arguably became the most desirable stock for growth investors in Canada. However, its stock has seen a massive crash this year, as it currently trades with 74.4% year-to-date losses at $44.65 per share after consistently delivering solid positive returns in the previous more than six years. But Shopify’s recent stock price performance doesn’t prove it a terrible investment for the long term.
While bears may continue to argue that Shopify stock was overvalued prior to this crash, even they can’t justify the key reasons for its huge year-to-date losses. If you have followed the Canadian tech space in recent years, you would already know that there was hardly anyone, including bears, who could predict such a big crash in SHOP stock nearly a year ago. Given that, I find it funny listening to bears’ arguments about Shopify’s slowing sales growth to justify its terrible stock performance this year. Let me explain why.
Bears’ arguments about Shopify’s crash
In the first quarter of 2020, when COVID-driven shutdowns and restrictions on physical activity forced businesses to shift to digital commerce, Shopify’s total revenue jumped by 86% YoY (year over year) to US$2.9 billion. This unexpected surge in demand for its services also drove its adjusted earnings to US$0.40 per share from just US$0.03 per share in the previous year, reflecting an unbelievable earnings growth of 1227% YoY. This growth suggests that businesses that might have waited for several years were forced to adopt digital commerce in 2020 because of the global pandemic. It simply means the pandemic helped Shopify deliver several years of financial growth in a single year.
After seeing such massive, unpredictable growth in a single year, any company would find it extremely difficult to retain its new customers in the coming year. Nonetheless, Shopify still managed to post a solid 57% jump in its 2021 revenue over 2020.
Any rational person could predict that the pandemic-driven e-commerce demand will gradually subside in the post-pandemic era. And this is exactly what’s happening right now. In 2022, the Canadian e-commerce giant expects its sales growth rate to be lower than its 2021 on a YoY basis. But given an unpredictable jump in its financial growth in the previous couple of years, I wouldn’t compare Shopify’s 2022 sales or earnings to the previous year. But bears still use its lower sales growth rate guidance as an argument to justify Shopify’s recent stock crash.
The fact that Shopify is continuing to expand its business with the addition of new innovative services for its merchants is enough to prove bears wrong. Recently, SHOP partnered with tech giants like Google and Twitter and announced more than 100 product releases. Given all these factors, I find SHOP stock to be highly undervalued right now that has the potential double or even triple in the coming years.
