Shopify (TSX:SHOP) is one of the world’s biggest e-commerce platforms. The company’s software and services ecosystem allows virtually anyone with an idea or business to open an online store. It is becoming increasingly difficult to refer to the company as a hidden gem growth stock as it is now roughly $90 billion and has been public for nearly a decade.
However, Shopify has been out of favour with investors for the past few years. In my view, sentiment has officially turned the corner, and this stock has clearly started making some significant moves higher.
Here are three reasons why I think this momentum can continue.
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E-commerce tailwinds likely to continue
Discretionary spending continues to be the economic driver most economies rely on for growth. Within this space, consumer preferences have clearly shifted toward companies selling their wares online. E-commerce growth continues to be strong despite overall concerns in the retail sector. In my view, this is the place investors want to invest in for the long term.
As more retailers focus on improving their online footprint, companies like Shopify, which offers a platform for businesses of all sizes to set up online shops, should see outsized growth. Global e-commerce spending is in the trillions and only growing. So is Shopify, whose gross merchandise value (GMV) surged 22% year over year to $67.2 billion during its second quarter. There is no apparent reason why Shopify, which serves over two million merchants, cannot continue to expand its user base and GMV for years to come.
Strong earnings growth likely
As companies mature in their life cycle, revenue growth tends to slow. Investors have certainly seen some of that with Shopify, which saw its revenue growth rates decline considerably from post-pandemic peaks.
However, I’d argue that those comps were artificially high, and investors are starting to realize that this company’s longer-term growth rate may be much more robust than previously thought a couple of years ago. While there’s still plenty of top-line growth likely over the long term, I also think the discussion for Shopify will shift toward earnings growth. On this front, the company has continued to perform well and is expected to grow its earnings by an average of nearly 40% annually over the next three to five years.
If Shopify can manage such a feat, I think the stock is undervalued here. That view includes the stock’s recent surge. In my view, continued earnings growth in the 40% range should lead to new all-time highs in the coming few years. That’s my base case, at least.
Profitability is key
As Shopify grows its earnings and continues to produce greater earnings per share projections over the long term, its current multiple of just 75 times forward earnings should look very reasonable. I’m forecasting earnings growth in the 40% range over the next three years. If Shopify can hit such a target, this multiple will come down considerably, and I think Shopify could easily trade at a 20 or 30 times multiple at a stock price double or triple where we’re at today in just a few years’ time.
Such growth would result in a doubling of earnings every two years, a recipe for fantastic investment returns if the company can perform up to expectations. That’s my base case for now. Thus, long-term growth investors looking for a top Canadian stock to buy ought to take a hard look at Shopify, particularly on any dips moving forward.
