After burning massive investor wealth for shareholders in 2022, tech stocks have crushed broader market returns year to date. For instance, Shopify (TSX:SHOP) stock lost roughly 80% in market value last year but has more than doubled in 2023. Despite its stellar gains, the TSX tech stock trades 54% below all-time highs, valuing the company at $127 billion by market cap.
Let’s see if SHOP stock can continue to deliver outsized gains for investors in the upcoming decade.
The bull case for Shopify stock
Shopify stock has already returned significant wealth to long-term shareholders, rising over 3,000% since its initial public offering in 2015. It is the second largest e-commerce platform in the U.S. after Amazon and experienced stellar growth during the COVID-19 pandemic, as several small and medium businesses were forced to set up an online presence.
However, once economies reopened, the growth in online sales decelerated sharply, dragging shares of Shopify and other e-commerce companies lower in the last two years. Further, Shopify also wrestled with poor strategic decisions, including the acquisition of Deliverr and focusing on creating a wide network of fulfillment centres to compete with Amazon. It exited both these segments to reduce its cash-burn rate and improve profit margins amid a challenging macro environment.
However, Shopify continues to grow at an enviable rate as sales surged 25% year over year in the third quarter (Q3) of 2023 to US$1.7 billion, as gross merchandise volumes, or GMV, surged 22% to US$56.2 billion. Comparatively, gross profits were up 36% at US$901 million, while it reported a GAAP (generally accepted accounting principles) operating profit of US$122 million, indicating a margin of over 10%.
Similar to other tech stocks, Shopify is positioned to benefit from high operating leverage. For instance, analysts expect Shopify’s sales to rise from $7.5 billion in 2022 to $11.3 billion in 2024. Comparatively, its adjusted earnings are forecast to rise from $0.05 per share to $1.4 per share in this period.
Is Shopify stock undervalued or overvalued?
Priced at 11.2 times forward sales and 70.7 times forward earnings, Shopify stock trades at a hefty premium. However, its earnings per share is forecast to grow by 278% annually in the next five years, allowing it to command a premium valuation.
Moreover, the TSX tech giant continues to expand its portfolio of products and services, resulting in higher subscription sales and customer engagement rates. It is also part of an expanding addressable market, which should drive sales and cash flows higher in 2024 and beyond.
During the Thanksgiving weekend in late November, Shopify’s merchant base generated GMV of US$9.3 billion, rising 24% year over year. The number of customers who purchased from Shopify-powered merchants rose to 61 million in 2023, up from 52 million last year.
Additionally, Shopify also saw a 60% increase in purchases via Shop Pay, which is the company’s online checkout feature.
If you can look past Shopify’s steep valuation and bet on its solid earnings growth, the TSX stock is a good investment today. While Bay Street is bullish on SHOP stock, analysts expect shares to move lower by 6% in the next 12 months, given consensus price target estimates.
