High-growth technology stocks have taken investors on a roller-coaster ride in the last four years. The equity market pulled back by a sizeable margin at the onset of COVID-19 in early 2020. However, tech stocks soon reclaimed their record highs on the back of strong consumer spending, a resilient global economy, and pandemic-related benefits.
The rally meant tech stocks were trading at a lofty valuation in 2021. But as central banks hiked interest rates to offset inflation, tech stocks were pummeled and trailed the broader markets significantly in 2022.
Last year, investors were bullish on the artificial intelligence megatrend and the possibility of multiple interest rate cuts in 2024, driving tech stocks higher once again.
For instance, shares of Shopify (TSX:SHOP) surged from $50 in March 2020 to $215 in November 2021. The TSX tech stock then fell to less than $40 in October 2022 and currently trades at $109.68.
Valued at $141 billion by market cap, Shopify is among the largest companies in Canada. Despite the volatility associated with Shopify, it has returned a staggering 3,000% since its IPO (initial public offering) in 2015.
Down 50% from all-time highs, let’s see if Shopify stock can continue to deliver market-beating returns to shareholders going forward.
Shopify is an e-commerce giant
Shopify is an e-commerce heavyweight and provides businesses with the tools and solutions to set up a digital presence. Over the years, Shopify has gained massive traction, currently accounting for 28% of the e-commerce market in the U.S.
Shopify has onboarded more than two million merchants across 175 countries. Its core products include turnkey solutions for retail websites. But it has since expanded into other verticals, such as payment gateways and point-or-sale devices.
While sales growth has decelerated in recent quarters, the company increased its top line by 25% year over year in the third quarter (Q3) of 2023. E-commerce sales are forecast to increase by almost 10% annually through 2028, which should allow Shopify to increase its sales further in the upcoming decade.
Wall Street expects Shopify to increase sales from US$5.6 billion in 2022 to US$8.4 billion in 2024. In the last 12 months, Shopify has focused on reducing its cost base by exiting low-margin businesses such as fulfillment centres and restructuring its business operations.
An asset-light business model should enable the Canadian tech behemoth to expand adjusted earnings per share to US$1.05 in 2024, up from just US$0.04 per share in 2022.
Shopify’s earnings to expand further
Priced at 75 times forward earnings, Shopify stock might seem expensive at first glance. But growth stocks trade at a premium for a reason.
Analysts tracking Shopify expect the company to expand its adjusted earnings per share by 205% annually between 2022 and 2027, according to data from Yahoo Finance. Given Shopify ended 2022 with adjusted earnings per share of US$0.04 per share, its adjusted earnings should expand to US$10.5 per share by 2027.
If Shopify stock is priced at 35 times trailing earnings, it should surge to US$350 per share, indicating an upside potential of 218% from current prices.
