After a period of extreme turbulence in 2022, several tech stocks gained momentum in the first quarter (Q1) of 2023. For instance, down close to 80% from all-time highs last year, Shopify (TSX:SHOP) stock is up 38% in the first three months of 2023.
Let’s see if Shopify stock can stage a comeback in the following months and end 2023 close to its record high.
The bull case for Shopify stock
Shopify is among the largest e-commerce platforms globally, ending 2022 with almost US$6 billion in sales, up from just US$1.5 billion in 2019. The COVID-19 pandemic acted as a tailwind for the Canadian tech giant, as several businesses had to establish an online presence amid nationwide lockdowns.
Around 10% of e-commerce sales in the U.S. took place on Shopify in 2022, and this number is likely to inch higher, as the company continues to widen its portfolio of products and services. In recent months, Shopify has allocated significant resources and capital to build a robust network of fulfillment centres, which should help optimize the supply chain of its merchant base.
Shopify has onboarded more than two million merchants, and it is fast becoming an indispensable partner for a majority of the small and medium businesses in North America.
Shopify has successfully expanded its ecosystem, allowing it to grow top line at an exponential pace. While it initially derived a majority of sales from subscriptions, its revenue is now driven by the merchant services vertical. This business segment includes sales from the fulfillment centre and ancillary services, including payments, digital marketing, and inventory tracking.
So, the company’s merchant base can easily access the relevant data and implement strategies to improve customer engagement rates, resulting in higher sales over time.
The bear case for Shopify stock
Shopify increased sales by 21% year over year in 2022. However, it was much lower than the growth rates of 86% in 2022 and 57% in 2021. Further, elevated inflation levels and interest rate hikes meant the tech heavyweight reported a net loss of US$3.5 billion in 2022 compared to a net income of almost US$3 billion in 2021.
Bay Street expects Shopify to increase sales by 18.4% year over year to $9 billion in 2023 and by 20% to $10.8 billion in 2024. Comparatively, its adjusted earnings are forecast to improve to $0.27 per share in 2024.
So, SHOP stock is priced at almost eight times 2024 sales and 240 times forward earnings, which is very expensive, given the current macro environment. There is a good chance for Shopify stock to move significantly lower in 2023, especially if the fears of an upcoming recession come true.
The Foolish takeaway
Despite the massive pullback in Shopify’s share prices in the last 15 months, the Canadian tech stock has returned close to 2,000% to investors since its initial public offering in 2015. It is unlikely for Shopify to replicate its historical gains, but the company’s expanding ecosystem, lower valuation multiple, and improving profit margins make it a top bet for long-term growth investors.
Analysts remain bullish on SHOP stock and expect shares to surge over 20% in the next 12 months.
