3 Things You Need to Know If You Buy SHOP Stock Today

Here’s why long-term investors may want to consider Shopify (TSX:SHOP) and SHOP stock on any major dips in the coming quarters.

| More on:
online shopping

Image source: Getty Images

Investing in high-return growth stocks has proven to be the most lucrative investing strategy over the past 15 years. Indeed, since the financial crisis (and prior to that, the Dotcom bust), tech stocks tend to have long secular growth periods that provide long-term investors with excellent value. One such top-performing growth stock in the Canadian market is Shopify (TSX:SHOP). Zooming out and looking at the company’s long-term chart below, it’s clear that investors who have held through thick and thin are still up big, if they bought this stock at the right price and simply held.

I think this same thesis will likely work out well over the long-run. Shopify has a number of secular growth catalysts worth considering. Here’s why I think SHOP stock should be on investors’ radar screens right now, as it steadily marches toward previous highs.

Shopify’s business model is timeless

Shopify’s status as an e-commerce platform provider for predominantly mid- and small-sized businesses has led to impressive growth in the past. During the pandemic, when businesses were forced to flock to an online business model, the company saw incredible subscription growth, which has since stagnated somewhat.

This makes sense. The bar was raised to astronomical levels, and many in the market thought this growth rate could be sustained for a lot longer than it was. Now, with the company seeing its growth rate stabilize, and its market share numbers hold steady around 30% in the e-commerce space, this is a company that’s much easier to value.

For those looking for long-term secular trends, I think Shopify remains a company worth considering. Yes, pandemic tailwinds are gone. But the company’s cutting-edge technology enables merchants to design, manage, market, and sell their products and services effectively. That’s something which will hold value over the long term, and will generate sticky subscription revenues worth considering.

Impressive financials bode well for long-term investors

Shopify reported $1.7 billion in revenue in the second quarter of 2023, an increase of 31% over the past year. That’s an impressive growth rate, and while it’s well off the triple-digit levels investors may have grown accustomed to five years ago, it’s still a growth rate that beats most large-cap stocks in Canada and elsewhere for that matter.

As the company’s growth rate normalizes, so to will the company’s valuation. At 15 times sales and 76 times earnings, SHOP stock certainly isn’t cheap. However, this multiple is still much lower than what investors were forced to pay during the company’s sky-high growth days.

Notably, Shopify also produced a gross profit of $901 million in the third quarter of 2023, 36% higher than the financial year 2022. It has also reported enhancement in the growth margin to 52%, making it an ideal investment option for investors seeking to invest in high-return stocks. In addition, to enhance profitability, Shopify sold off its logistics division to Flexport to focus on its area of expertise and boost profitability.

Still impressive growth opportunities abroad

Being one of the established Canadian tech companies, Shopify is well-known in the North American market. However, the company has ample opportunities to grow that are yet to be explored. Shopify’s retail sales penetration year over year is 15% in North America, and analysts expect the numbers to grow in the coming years. In terms of the offline market, Shopify’s numbers are also increasing as the company has taken over 2% of retail sales in North America and 0.5% globally.

In addition, as the bond yields decrease, Canadian investors will gain more confidence by taking more risk and diversifying their investment options towards stocks to gain higher returns. Moreover, the business is also expected to flourish as the interest rate is lowered.

Bottom line

Overall, investing in Shopify remains a compelling long-term investment for those seeking relative outperformance in the world of tech stocks. I’ll be keeping a close eye on how Shopify’s growth rates change over time. But for now, this is a company that looks to be comfortably able to grow into its current valuation.

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.

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

More on Investing

Volatile market, stock volatility
Investing

Growing Volatility: 3 Stable TSX Stocks to Buy Right Now

Given their solid underlying businesses and healthy growth prospects, these three stable TSX stocks could strengthen your portfolios.

Read more »

Construction work on a site
Dividend Stocks

2 Engineering & Construction Stocks You Can Buy and Hold for the Next Decade

Two prominent engineering and construction stocks are buying opportunities before the industry rebounds and grow in the next decade.

Read more »

Canadian Dollars
Dividend Stocks

For a Shot at $5,000 in Annual Passive Income, Buy 1,975 Shares of This TSX Stock

Are you looking to earn steady income? While there is no certainty in stocks, this stock can give you a…

Read more »

Target. Stand out from the crowd
Dividend Stocks

1 Magnificent Canadian Dividend Stock With 33% Upside to Buy and Hold Forever

Dividend stock Brookfield Business Partners LP (TSX:BBU.UN) is a powerhouse of growth, with even more to come in 2024.

Read more »

top TSX stocks to buy
Dividend Stocks

Passive Income: How Much to Invest to Get $6,000 Each Year

TSX energy stocks such as Enbridge can help you earn a passive stream of recurring income.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Investing

Where to Invest Your $7,000 TFSA Contribution

Unsure of what to do with a $7,000 TFSA contribution? Stick it in this ETF and chill.

Read more »

Value for money
Investing

3 Canadian Value Stocks to Buy Right Now

These three value stocks are excellent to buy in this volatile environment.

Read more »

protect, safe, trust
Dividend Stocks

Income Investors: 2 Safe Dividend Stocks to Own for Passive Income for Years

Long-term passive-income stocks should ideally offer enough dividend growth to counteract inflation while preserving or growing your capital.

Read more »