Shares of Canadian tech giant Shopify (TSX:SHOP) have surged 53% year to date, valuing the company at $92 billion by market cap. Despite these market-beating gains, Shopify stock is still trading 66% below all-time highs.
Let’s see if it makes sense to invest in this tech stock at the current valuation.
Is Shopify stock still worth it in 2023?
Shopify aims to build a global commerce operating system and provide merchants with an expanding set of tools and capabilities. As merchants grow online sales, they reinvest in their businesses, which benefits multiple stakeholders, including Shopify.
The e-commerce heavyweight helps companies build an online presence. As product sales are swiftly moving online, Shopify is well poised to take advantage of multiple secular trends. The company has successfully created an ecosystem. It offers a platform for businesses to easily create and operate a website and start selling products online.
Shopify also offers ancillary services that help merchants and businesses enhance their online presence by offering digital marketing services as well as online payment capabilities. Moreover, you can track sales and inventory and secure business funding via Shopify Capital, all of which make Shopify the preferred online partner for companies across sizes.
What’s next for SHOP stock and investors?
In the first six months of 2023, Shopify reported sales of US$3.2 billion, an increase of 28% year over year. Analysts tracking the company expect sales to rise 24% to US$6.95 billion in 2023 and by 19% to US$8.26 billion in 2024.
This expansion in the top line should allow Shopify stock to expand adjusted earnings from US$0.05 per share in 2022 to US$0.49 per share in 2023 and US$0.74 per share in 2024. So, SHOP stock is priced at 9.8 times forward sales and 108.6 times forward earnings, which is quite steep even for a growth stock.
However, long-term investors might still want to buy the stock at its current valuation due to Shopify’s wide economic moat and improving profit margins. A report from Grand View Research forecasts the global e-commerce market to grow by 15% annually through 2027, suggesting Shopify is growing at a much faster pace than the industry average.
Shopify stock has struggled in recent quarters due to the selloff surrounding tech stocks as companies continue to wrestle with a challenging macro environment. Investors were also worried about Shopify’s plans to build a fulfillment network, which resulted in mounting losses.
However, as losses grew significantly and with an unclear path to profitability, Shopify exited this business to boost profit margins. Shopify reported impairment charges related to the write-down, and its losses totalled US$1.2 billion in the last two quarters, which was lower than the US$2.7 billion posted in the year-ago period.
After adjusting for one-time charges, Shopify reported a net income of US$190 million, or US$0.15 per share, in the first six months of 2023.
The Foolish takeaway
Shopify has onboarded over two million merchants on its platform, which resulted in strong subscription sales and robust cash flows. It ended the second quarter with a free cash flow of US$97 million compared to a cash outflow of US$87 million in the year-ago period.
Investors with a large risk appetite can consider investing in Shopify stock despite its expensive valuation. Analysts remain bullish and expect shares to surge 30% in the next 12 months.
