Shopify (TSX: SHOP) has created massive wealth for early investors. The Canadian tech stock went public in 2015 and has returned 2,150% to investors since its IPO, or initial public offering. Currently valued at a market cap of $90 billion, Shopify is among the largest companies on the TSX. However, the pullback in growth stocks since the start of 2022 has dragged shares of the Canadian e-commerce company lower by 67% from all-time highs.
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Is Shopify stock a buy, sell, or hold?
Investors are wary of Shopify’s decelerating revenue growth, lower consumer spending, and a sluggish macro economy, resulting in a steep selloff in the company’s share prices. Moreover, Shopify is also struggling to report consistent profits amid elevated inflation levels and a higher-cost environment.
In order to improve the bottom line, Shopify exited its fulfillment center business and is forecast to end 2024 with adjusted earnings per share of $1. It suggests SHOP stock is priced at 70 times 2024 earnings and 9.5 times forward sales, which is quite expensive even for a growth stock.
Shopify enjoys a wide economic moat as it is the second-largest e-commerce platform in the U.S. after Amazon. It has onboarded over two million merchants on its platform, allowing it to end the second quarter (Q2) with monthly recurring revenue of US$139 million.
However, I expect Shopify stock to underperform the broader markets in the near term due to its slowing revenue growth and lofty valuation. Analysts expect the TSX tech stock to surge 20% in the next 12 months. Here’s another TSX tech stock I believe should outpace Shopify in the next year.
The bull case for Descartes stock
Valued at $8.6 billion by market cap, Descartes (TSX: DSG) leverages technology and networks to simplify the supply chain management for enterprises. It offers a portfolio of cloud-based solutions to improve the efficiency of its client base.
Descartes is well positioned to benefit from multiple secular tailwinds. As companies worldwide are looking to gain traction in global markets, the increase in shipping volumes should widen the total addressable market for Descartes.
The tech company has already increased sales from $445 million in fiscal 2020 to $663 million in fiscal 2023 (ended in January). Descartes offers a flexible pricing model to customers who can either pay via subscriptions or by applying for a perpetual license.
Descartes generates a majority of its sales from subscriptions, allowing it to generate cash flows across market cycles, providing investors with revenue visibility. Its subscription business also enjoys gross margins of 80% compared to the 40% margin of its professional services segment.
Over the years, the Canadian company has focused on gaining traction and entering new markets on the back of a disciplined acquisition strategy. Analysts tracking Descartes stock expect sales to increase to $854 million in 2025. Moreover, its adjusted earnings should expand from $1.61 per share in 2023 to $2.21 per share in 2025.
So, DSG stock is priced at 45.6 times forward earnings, which is not cheap. But its earnings before interest, tax, depreciation, and amortization of 40% allow the company to report consistent profits and deploy cash flows toward accretive acquisitions.
