Shopify Inc. (TSX:SHOP) has a very exciting and volatile history. But this is expected from disruptors that have gone through the pain and glory of creating a new industry. In Shopify’s case, it has all been worth it. Shopify’s stock price has doubled in the last year and is up 420% since 2019.
Despite this, I think that on a long-term basis, investing in Shopify stock (SHOP) is a good idea. This is because I believe it has more upside as the company continues to solidify its position in the e-commerce industry.
Shopify’s growth still going strong
The latest quarter saw revenue growth of 25%, gross merchant volume growth of 22%, and gross profit growth of 36%. Also, operating income was $122 million, or 7% of revenue, compared to a loss one year ago. Finally, free cash flow was positive for the fourth consecutive quarter.
We are seeing Shopify’s business continually transform. As it continues to find new ways to help merchants with their businesses, Shopify’s business has also flourished. We can see this in the company’s results, which are increasingly demonstrating the power of its ideas.
Looking ahead, we can expect that Shopify will continue to push the boundaries of the e-commerce world. And as this e-commerce leader continues to do so, it will continue to transform e-commerce. Shopify’s value proposition is becoming increasingly obvious to even the biggest, most well-established companies like PepsiCo. Inc. (NASDAQ: PEP) and Anheuser-Busch Inbev SA (NYSE:BUD).
Future opportunities are plenty at Shopify
In Shopify’s latest conference calls, management talked about the potential of artificial intelligence to generate more value for its clients. Consequently, Shopify has introduced new platforms to offer these benefits to them.
For example, Shopify recently introduced Sidekick, an AI enabled e-commerce assistant. Sidekick encapsulates all of Shopify’s analytics and data with a machine learning algorithm for merchants to use. Sidekick will analyze data and use it to help with decision-making, such as how to run promotions, store design, content, and analysis.
Also, the company recently introduced Shopify Audiences. Audiences helps merchants find new customers by generating custom audience lists and personalized insights to help boost advertising results. Merchants have seen an up to 50% improvement in the cost of customer acquisition by using Audience. It’s yet another tool to help Shopify’s merchants succeed.
As Shopify puts it, it’s “a new era of data-driven entrepreneurship and growth”.
Strong cash flows to reinvest into the business
In Shopify’s most recent quarter, free cash flow came in at $276 million, for a free cash flow margin of 16%. This result is significant, as it shows the earnings power of the business. Also, it gets cash into the hands of management who can deploy it by investing in growth opportunities, which can increase the company’s scale and breadth. This investment can take the form of new product ideas, partnerships, or even acquisitions.
The bottom line
While richly valued, at 52 times 2024’s expected earnings, Shop stock holds big potential to match this valuation. While I would probably wait to add this stock to my portfolio, as I believe we could see some short-term weakness in Shopify’s stock price, I would definitely recommend monitoring it with the intent of investing in it at lower prices.
