The Bank of Canada lowered interest rates by 25 basis points to 4.75% last week. The central bank stated that interest rates might move even lower in the next 12 months if inflation stays below the 2% threshold. Generally, falling interest rates act as a tailwind for stocks, as companies can raise debt at a lower cost and fuel their expansion plans. Further, as interest rates are slashed, asset classes such as equities and gold gain popularity among investors.
Basically, if the Bank of Canada eases its lending rates, equities will likely continue moving higher and extend the ongoing bull run. Here is one magnificent TSX stock to own in the upcoming bull market.
The bull case for Shopify stock
Shopify (TSX:SHOP) went public in 2015 and has since returned close to 2,400% in the last nine years. Today, Shopify stock is valued at US$82 billion by market cap and is one of the largest companies in Canada. Despite its outsized gains, the TSX tech stock is down over 50% from all-time highs, allowing you to go bottom fishing and buy the dip.
The Shopify platform enables companies of all sizes to set up an online presence with digital storefronts. It also offers companies other tools and services, ranging from digital marketing and inventory management to online payments and much more. Over two million merchants, including major brands such as Nike and Allbirds, use Shopify to conduct their business online.
A report from Statista estimates Shopify’s market share at 28% in the U.S. e-commerce software platform segment, higher than peers such as WooCommerce and Wix at 17% and 16%, respectively.
The COVID-19 pandemic acted as a massive tailwind for e-commerce companies such as Shopify, allowing it to increase sales from US$1.55 billion in 2019 to US$5.6 billion in 2022. However, in the last 15 months, Shopify’s sales growth has decelerated while profit margins have narrowed, making investors nervous. But Shopify is on track to increase sales from US$7.06 billion in 2023 to US$8.54 billion in 2024 and US$10.27 billion in 2025.
To boost the bottom line, Shopify exited the low-margin fulfillment business and is forecast to end 2024 with adjusted earnings per share of US$0.99. In the first quarter (Q1) of 2024, Shopify reported an operating income of US$86 million, compared to a loss of $193 million in the year-ago period. Its Q1 adjusted earnings per share stood at US$0.20, higher than estimates of US$0.17 per share.
What is the target price for Shopify stock?
Out of the 29 analysts covering Shopify stock, 18 recommend “buy,” 10 recommend hold,” and one recommends “sell.” The average target price for SHOP stock is $75.5, 20% higher than the current trading price.
Wall Street expects Shopify to expand its adjusted earnings by 51% annually between 2023 and 2028. It means Shopify stock should end 2028 with an earnings per share of US$5.9 per share. If the tech stock is priced at 30 times forward earnings, Shopify should rise to US$177 by June 2028, indicating an upside potential of 181% from current prices.
