The TSX produced a tech darling in 2019 that ruled Canada’s primary stock exchange in 2020. Shopify (TSX:SHOP) rose to superstardom due to the COVID-triggered e-commerce boom. The stock delivered an average return of 185.94% in two years but lost 74.8% in 2022.
If you invest today, you wouldn’t say Shopify was a phenomenal Canadian stock. At $75.41 per share, the tech stock is down 26.9% year to date and hasn’t been this cheap in years. Moreover, the current share price is 94.97% lower than $1,500.33 at the start of January 2021.
In April 2022, Shopify announced a 10-for-1 stock split because management felt the price was too high for regular investors. The shares split on June 29, 2022, although the price was already considerably low. Today, market analysts’ price target in 12 months is between $107.97 (average) and $137.61 (high). However, besides the absurdly low price, there are other issues against it that you must consider.
High-risk, not low-risk investment
Some market observers maintain that Shopify is a high-risk, not low-risk investment. The e-commerce platform boasts a recurring revenue model with strong growth potential, yet profitability remains in question. But Harley Finkelstein, the president of Shopify, believes otherwise.
In 2023, total revenues (subscription and merchant solutions) increased 26% year over year to US$7 billion, while net income reached US$132 million compared to the US$3.5 million net loss in 2023. Its chief financial officer, Jeff Hoffmeister, said Shopify achieved a free cash flow (FCF) margin of 21% and delivered a 30% revenue growth in the fourth quarter (Q4) of 2023 when adjusting for the disposition of the logistics business.
Finkelstein added, “2023 was an incredible year for both Shopify and our merchants. Our strong Q4 and annual results are a powerful testament to the progress we have made building fast, reliable, and unified software for merchants of all sizes.”
Other business highlights last year include an expanded unified commerce operating system that enables merchants to start, scale, and grow their businesses. Shopify also launched Shopify Magic with artificial intelligence (AI)-enabled features and an AI-enabled commerce assistant, Sidekick. The company introduced new enterprise-grade payments hardware and POS Terminals in the U.S. and Canada.
Strong start to 2024
At the close of 2023, management forecasted revenue to grow at a low-20s percentage rate on a year-over-year basis. In Q1 2024, revenue and monthly recurring revenue rose 23% and 32% to US$1.9 billion and US$151 million versus Q1 2023. While FCF climbed 169.77% to US$232 million from a year ago, Shopify incurred a net loss of US$273 million.
Nonetheless, Finkelstein said, “We are building a 100-year company, and we will continue to remain fiercely agile, capitalizing on every opportunity that accelerates the success of our merchants, enables us to continue to build world-class products, and enhances operational efficiency for better returns.”
Wait and see
Investors can wait for Shopify’s Q2 2024 earnings results before investing. The Canadian firm has competitive strengths but faces fierce competition from Chinese counterparts like PDD Holding’s Temu. More importantly, Shopify must show consistent profit growth to bring back its lost glory.
