Beyond the Hype: Does Shopify Stock Still Have Room to Rally?

These major fundamental factors make Shopify stock worth all the hype built around it over the years.

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With its solid 50% year-to-date gains, Shopify (TSX:SHOP) continues to trade on a solid note, making it among 2023’s top-performing Canadian tech stocks. Although SHOP stock has seen about 24% value erosion in the last three months amid the latest round of the stock market selloffs, most Street analysts still appear to be optimistic about the company’s future growth potential by giving it a “buy” rating.

But does Shopify stock’s big year-to-date gains really have any fundamental basis to make it worth all the hype built around it over the years? Before discussing that, let’s take a closer look at some key factors that could drive its stock in the coming years.

Shopify stock

It’s been more than eight years now since Shopify stock was listed on the Toronto Stock Exchange and the New York Stock Exchange in May 2015. Within a few years after going public, SHOP stock gained huge popularity among growth investors by yielding outstanding returns on their investments.

A big part of Shopify’s success story could be attributed to the big digital transition of small- and medium-sized merchants we have seen in the last decade. For example, nearly a decade ago, not many small- and medium-sized merchants across the globe were willing to build an online presence due mainly to perceived high costs, doubts about its profitability, and other infrastructure complexities. However, Shopify’s innovative e-commerce offerings later simplified the process of building online stores, even for small merchants, and made it convenient and cost-efficient for them to rapidly expand their business reach.

Another big boost for e-commerce for Shopify came after the World Health Organization declared COVID-19 a global pandemic in early 2020, forcing authorities across the globe to take strict measures to restrict the spread of the virus. As restrictions on physical activity during the pandemic phase badly affected business activity, the adoption of digital commerce exponentially accelerated globally, giving Shopify’s financial growth a massive boost.

This trend was the key reason why Shopify has managed to post an outstanding 732% sales growth in the five years between 2017 and 2022. During the same timeframe, its adjusted annual earnings also soared by 150%. And these positive factors explain why SHOP stock has yielded some eye-popping returns on investments over the years.

Does Shopify stock still have room to rally?

As discussed above, Shopify’s outstanding rally since its listing on the Canadian and American exchanges is clearly backed by its strong fundamentals. However, we shouldn’t forget that SHOP stock nosedived by 73% in 2022 amid a big crash in growth stocks, making it look way too undervalued based on its future growth potential.

Last year’s big declines in Shopify stock resulted from a damaging retail investor behaviour called panic selling, which started after some horrifying headlines in mainstream media about the possibility of a recession shook investors’ confidence in the stock market. While everyone wants to get rich overnight by buying a rallying stock, only well-experienced investors can take advantage of opportunistic buying scenarios and hold undervalued stocks for the long term.

As the digital commerce trend is still far from over, Shopify continues to make its e-commerce offerings more attractive for merchants with the help of innovation and AI (artificial intelligence) technology. Considering that, I expect its financial growth trends to improve further in the coming years, which should drive another remarkable rally in SHOP’s share prices in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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