Shopify (TSX:SHOP), once Canada’s darling tech growth stock driving the TSX, faced significant price weakness in May that somewhat derailed its recovery path and wiped out its 20% gain in early 2024. Regardless, SHOP stock has posted a remarkable recovery during the past weeks and narrowed its year-to-date losses from 20% to 9%. The $113 billion e-commerce giant finds itself itself in a tug-of-war between impressive growth and a challenging economic climate, but market analysts are increasingly bullish on its long-term prospects.
There’s ample opportunity for Shopify to be a winner for new investors buying the volatile large-cap growth stock in 2024, but volatility may spike as the market closely monitors the impact of a key revenue model change during the second half of the year.
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Shopify stock: A growth engine that’s still running
Despite the investing hype shifting towards artificial intelligence (AI) stocks this year, Shopify’s core business remains on a strong growth trajectory that may attract investors back to the once highly sought e-commerce stock during the remainder of 2024.
Shopify saw a robust 23% year-over-year revenue increase during the first quarter to US$1.9 billion, excluding disposed logistics operations. The company’s merchant base continues to thrive, and organic revenue was even more impressive at 25%. Additionally, Shopify is making strides in offline commerce, with 52% location growth for merchants with over 20 physical stores.
The company is also rolling out new AI features with Shopify Magic, though its success in driving further revenue growth and improving operating margins remains to be seen.
Headwinds and valuation concerns
Shopify faces significant headwinds during the remainder of 2024. High interest rates and past inflationary episodes squeezed consumer spending. This directly impacts Shopify merchants’ expected sales growth rates going into the festive season of the year. While future interest rate cuts could benefit European and North American consumers, and Shopify, sustained high rates could weaken a bullish investment thesis for a strong SHOP stock during the second half of this year.
Further concerns for investors considering buying SHOP stock lie in its current valuation. With a forward price-earnings (PE) ratio exceeding 62, new investors are essentially paying a hefty premium for projected future earnings. This translates to a very long potential “payback” period on the investment, if market hype for e-commerce stocks remains subdued.
Reasons for Shopify stock investor optimism
Despite the steep valuation and broad e-commerce market growth challenges, there are reasons to be optimistic. Shopify boasts an outlook for sustained double-digit revenue and earnings growth over the next five years. Additionally, its cash flow generation is improving, providing valuable resources for sustained innovation and potential future acquisitions. If the business continues on its projected growth trajectory, the high valuation could become more justifiable in the long run.
Beware the shifting revenue model!
Shopify’s recent shift from fixed contract rates to variable platform fees introduces some uncertainty during the second half of 2024.
While a majority of existing premium merchants chose to lock into favourable three-year contract rates, this change might impact future revenue stability and predictability. How merchants choose their billing structure could affect Shopify’s Monthly Recurring Revenue (MRR) going forward.
Is SHOP stock a buy?
Shopify presents a complex investment opportunity. While the innovative commerce technology platforms vendor exhibits strong growth potential and a promising future, the economic climate and high valuation introduce significant risk.
Beyond one’s strong conviction on the growth stock’s potential for sustained recovery during the remainder of the year, the decision whether SHOP stock is a buy now should include a close examination of the individual’s risk tolerance and their remaining investment horizon.
Shares may remain volatile for longer if revenue model changes burn management’s fingers. That said, a long-term investment approach could allow investors ample time to participate in Shopify stock’s potential rally when enthusiasm returns to e-commerce again.
