Given the current slump in the Canadian stock market, investors are in search of stocks that can provide them with market-beating returns. However, to do so, they need to select companies that have strong financials and solid long-term growth plans and that can help them outperform the industry.
In this regard, here’s why I think Shopify (TSX:SHOP) is an excellent choice to consider right now.
Shopify posts excellent five-year returns
Shopify’s recent earnings reports have highlighted the strength of this e-commerce company’s overall business model. Of course, looking at the performance of SHOP stock since the beginning of 2022, investors may take a different view.
That said, over the past five years, Shopify’s stock price is still approximately 200% higher than where it started. Thus, even factoring in the massive decline from its peak seen last year, SHOP stock has still provided investors with a compounded annual growth rate of 24%. There are few companies in this market that have the potential to run like Shopify in a bull market. Thus, for those considering preparing for the next bull market run, this e-commerce platform provider (with revenue growth of around 40% per year, nonetheless) is a great option to consider.
That’s not to say there aren’t risks with SHOP stock
Despite impressive growth prospects over the long term, Shopify’s valuation is what has concerned many investors. This is still a stock that’s mostly valued on a price-to-sales basis. While Shopify had turned profitable in the past, it’s since posted negative earnings over the past year and could continue to be a loss-producing company in 2023.
Investors don’t like companies that lose money in this environment. Right now, it’s not about top line growth. Investors care about profitability. Thus, the metrics investors use to assess Shopify appear to have shifted, and this stock remains out of favour.
Canadian e-commerce giant beats Q4 earnings estimates
That said, I think there’s actually a lot to be liked about Shopify’s forward-looking prospects. Shopify brought in adjusted earnings per shares of US$0.07 in the fourth quarter (Q4), signaling perhaps it’s turning the corner toward becoming a profitable company again.
Of course, it’s consistent profitability investors want. Thus, it may be a few quarters until these numbers are fully appreciated.
But on the top line, Shopify’s revenue growth of more than 25% remains robust. While the market may have been expecting more from this high flyer, its year-over-year comps remain difficult to beat. As Shopify gets larger, its growth metrics become more difficult to beat. That’s just the way of life for large-cap tech.
Thus, Shopify’s Merchant Solutions segment, which saw year-over-year growth of 29.7% this past quarter, will need to pick up the pace. Additionally, growth of 13% in gross merchandize value and 14% growth in subscription profits need to ramp up.
I think Shopify and its team are up to the task. We’ll just have to see if the macro environment allows it.
