Shopify Stock: Buy, Sell, or Hold?

Shopify stock (TSX:SHOP) has fallen back once again on earnings, but there are still reasons to consider at least holding the stock.

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Shopify (TSX:SHOP) joined the rest of the tech stocks in seeing a fair drop in share price last month after reporting earnings that didn’t impress investors. But after years of balancing the books and investing in what it does best, is this merely a bump in the road? Or are more drops to come?

Buy

Shopify’s recent earnings still demonstrated impressive growth and indeed profitability. The company’s revenue increased by 23% year over year, and when adjusting for the sale of their logistics businesses, the growth jumps to 29%. This indicates a healthy demand for their services and products, reflecting positively on the business model and market position.

Furthermore, Shopify’s gross profit surged by 33%, showcasing efficient operations and improved margins. This growth in profitability is a key indicator of the company’s ability to generate returns on its investments and manage costs effectively. 

Shopify’s management, as highlighted by President Harley Finkelstein, emphasizes building a long-term, sustainable business. Their commitment to operational discipline and strong execution bodes well for the company’s future growth prospects. This was supported by the company’s outlook, with expectations of high-teens percentage revenue growth for the second quarter of 2024.

Sell

So why the drop? Shopify’s stock price may already reflect the strong financial results and optimistic outlook. If the market’s expectations are too high, there’s a risk that even excellent performance might not be enough to justify further price appreciation.

What’s more, the sale of Shopify’s logistics businesses could create a revenue growth headwind of approximately 300 to 400 basis points. While the company expects to mitigate this impact, there’s uncertainty about how effectively they can do so and whether they can maintain their historical growth rates.

Add to this that Shopify expects a decrease in gross margins for the second quarter of 2024 compared to the first quarter. This could be a concern for investors, especially if the trend continues or if the decrease is larger than expected. And with operating expenses rising, competition a major factor, and consumers cutting back, it hasn’t been the best time to jump into Shopify stock.

Hold

But that may not mean you should up and sell the stock either. As we’ve seen, Shopify stock has rebounded before. Even so, Shopify has demonstrated consistent revenue growth, with a 23% increase year over year and 29% growth when adjusting for the sale of its logistics businesses. While this growth is impressive, it may not be enough to justify aggressively buying more shares, especially considering potential headwinds in the future.

For now, Shopify’s financial metrics, such as gross profit and free cash flow margin, have shown significant improvement. However, some investors might prefer to wait and see if these trends continue before making a decision to buy more shares.

And while the company may not have a robust outlook for the future, it still remains positive. It holds expectations of high-teens percentage revenue growth for the second quarter of 2024 – not as robust as some investors might hope for. The company’s guidance suggests a slight decrease in gross margins for the upcoming quarter, which could temper investor enthusiasm. But this outlook will still hold the company up for now. So with strong fundamentals and promising growth prospects, it could at least be a hold for investors today.

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 Amy Legate-Wolfe has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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