After climbing to their highest level in more than two years in February 2024, shares of Shopify (TSX:SHOP) have seen steep declines of late. With a slide of around 28% over the last four months, SHOP stock currently trades at $70.16 per share with a market cap of $100.3 billion. By comparison, the TSX Composite Index has gone up by nearly 6% in these four months. As investors remain skeptical about the timing of upcoming interest rate cuts, many growth stocks, including Shopify, have witnessed a downward movement.
In my opinion, this significant pullback in Shopify stock could be an excellent opportunity for investors to buy this high-quality growth stock at a big bargain, as it appears undervalued based on its long-term growth outlook. Now, let me quickly give you three more reasons why you should consider adding Shopify to your portfolio right now.
Shopify’s strong profitability growth despite economic challenges
One of the main reasons why Shopify is a great growth stock is its consistent financial performance. Despite the ongoing macroeconomic challenges and global economic slowdown, the company has managed to maintain its stellar revenue and earnings growth.
In the first quarter of 2024, Shopify reported a 23.4% YoY (year-over-year) increase in its total revenue to US$1.9 billion, beating analysts’ expectations. After adjusting these figures for the recent sale of its logistics businesses, the e-commerce platform giant’s revenue growth rate was around 29% YoY. The company also posted an adjusted quarterly net profit of US$256 million compared to a profit of just US$12 million in the same quarter of the previous year. This recent improvement in Shopify’s profitability could primarily be attributed to the lack of dilutive impact from the logistics business and its successful pricing strategies on the standard plans.
With this, Shopify’s total revenue in the last 12 months has surged 45.6% YoY, while its adjusted earnings have improved significantly from US$0.03 per share to US$0.92 per share.
Strong free cash flow and financial position
Shopify’s strengthening financial growth figures clearly reflect how the company has continued to benefit from the accelerated shift to online shopping in the last few years. However, this is not the only aspect that makes it an attractive stock to buy right now. The company also has a strong free cash flow and a solid financial position, which allows it to invest in growth opportunities and innovations.
In the first quarter, Shopify’s free cash flow margin doubled to reach 12%, up from 6% a year ago. Its free cash flow for the quarter jumped by nearly 170% YoY to US$232 million. At the end of the quarter, its cash and marketable securities amounted to US$5.2 billion. This strong liquidity and financial position could continue to ensure that Shopify has the necessary resources to invest in growth opportunities and weather any potential market volatility in the future.
Continued focus on key long-term growth drivers
The final reason that makes Shopify a top growth stock to buy on the dip now is its relentless focus on its long-term growth drivers. The company has been expanding its product portfolio, adding new capabilities to its platform, and expanding its global reach to be able to serve a wider range of merchants and consumers. Given that, I expect Shopify to continue leading the global e-commerce platform segment, which is expected to grow rapidly in the long run as more businesses shift their operations online.
