The movements of volatile stocks like Shopify (TSX:SHOP) are often difficult to figure out. This is because they trade as much on sentiment and investor psychology as on fundamentals. In Friday’s trading, Shopify stock rallied approximately 4%. This follows a sharp rally from the stock’s May lows (+19%).
What’s going on with the shares of Shopify?
Shopify stock falls
During the pandemic, Shopify’s stock price rallied to new and seemingly unsustainable highs, hitting $214 per share back in November of 2021. This was a function of the strength of the e-commerce business, which got a big boost with stay-at-home orders. It was also a function of investor excitement and optimism related to everything e-commerce.
But then, the year 2022 ushered in a new reality and a new perception. The pandemic was ending, consumers were once again visiting malls, and life was getting back to “normal.” What would become of Shopify? Investors grew nervous, and their optimism quickly faded to tension and nervousness. This sentiment could not command the lofty valuations that Shopify stock had been used to, and the stock got hit hard.
Shopify continues to impress
In Shopify’s latest quarter, the first quarter (Q1) of 2024, the company once again reported exceptionally strong results, signifying the lasting trend of the e-commerce business. Revenue in the quarter increased 23% to $1.9 billion, and this was accompanied by an increase in margins. For example, Shopify’s gross margin increased to 51.4%, and its free cash flow margin increased to 12%.
However, the company reported a surprise loss of $0.21 per share and said that the sale of the logistics business would negatively affect second-quarter revenue growth. This means that we should expect revenue growth in the high teens. This sent Shopify’s shares tumbling 18% that day.
Today, the value in Shopify stock after that dramatic fall is being highlighted by different analysts. For example, JP Morgan analysts initiated coverage on Shopify with an overweight weighting. Also, Evercore upgraded Shopify to an outperform, with a US$75 target price.
Looking ahead
Gone are the days of negative free cash flow and questions of cash burn. Today, Shopify is decidedly ramping up its profitability and generating increasing amounts of cash flow. In the first quarter, cash flow from operations totalled $238 million, 138% higher than last year.
Analyst earnings estimates are also on the rise. In 2024, analysts estimate that Shopify will earn $0.98 per share, 34% higher than the prior year. Earnings are expected to grow 29% in 2025 and 36% in 2026.
Beyond the numbers, the company has continued to expand to new geographic markets and to introduce new ways to make the business owner’s experience better and easier. For example, Shopify introduced Sidekick, an AI-enabled e-commerce assistant. Sidekick encapsulates all of Shopify’s analytics and data with a machine-learning algorithm for merchants to use. Sidekick will analyze data and use it to help with decision-making, such as how to run promotions, store design, content, and analysis.
The bottom line
In conclusion, Shopify’s stock price is rallying as analysts are upgrading the stock and investors are buying the dip. The business remains strong, but the valuation of the stock remains high. So, a strategy of buying the dips seems like a very reasonable one to me.
