Shopify (TSX:SHOP) stock jumped 35% in November as seasonality kicked in. The e-commerce giant is still trading 31% below its 2021 peak, although the company has steadily grown its revenue and gross merchandise volume. However, if you look at the valuations, the stock trades at a premium. A 17 times price-to-sales ratio for a company growing its sales by mid-20% or a 99.5 times price-to-earnings ratio for a company that has yet to deliver a full year of net profit since the pandemic makes the stock overvalued. However, Shopify’s future is bright.
Shopify on a path to stable growth
Shopify’s flywheel strategy of growing with the merchants has brought sustainability to revenue. The company has also delivered five consecutive quarters of operating profits. The company has achieved the scale to meet its expenses and post profits. It has succeeded in sustaining alongside Amazon and offering brands a viable alternative to building an online presence.
E-commerce comes with seasonal swings and Shopify is not immune to it. Consumer spending has been weak since 2022 as high interest rates and inflation reduced purchasing power. Despite this, Shopify continued to post 20% revenue growth. A revival in consumer demand next year could see an uptick in online sales.
There is a possibility that Shopify could see revenue grow faster than 20–25% in 2025. Moreover, the increasing penetration of Shopify Payments and artificial intelligence (AI)-efficiency could help it earn more from sales. I expect profit growth to stabilize in the next three to five years.
Is this stock a buy at the current price?
With revenue growth accelerating and profits stabilizing, where could the stock price be in five years? Shopify is a business where turnover matters. Hence, we look at sales. As Shopify’s business increased, its sales growth slowed from above 100% in 2016 to above 50% in 2021. And now the sales growth is hovering around 25%.
However, I expect the weak macroeconomic scenarios burdening consumer purchases to ease and boost commerce. A recovery in demand will take longer than a year as interest rate cuts have to seep in and consumers have to repay their older debt before returning to spending.
While sales growth could break the 25% range in 2025, it could accelerate beyond 30% in the next three to five years. The adoption of 5G technology could further enhance online sales. Tech companies are still testing the AI possibilities in boosting commerce, and you can be assured that Shopify will be there to tap it.
At present, Shopify’s 2024 sales per share stands at $6.38. If this grows at a compounded annual growth rate (CAGR) of 30% in the next five years, its sales per share could reach $23.76 by 2029. With an estimated price-to-sales ratio of 10 times, Shopify’s stock price could reach $237.6, representing a 60% upside from the current price of around $149.
It is not an attractive return for five years. Instead of buying the stock for a five-year term, you could adopt a different strategy.
How to earn money from Shopify in one, three, and five years
You could take advantage of Shopify’s seasonal volatility and buy stocks worth $500 to take advantage of the holiday season rally, which lasts till January. You could then sell the stock and buy them around March when the price falls below $100. Another strategy is to keep accumulating more shares below $100 and building a strong portfolio. Once the stock crosses $220 in the next three to five years, you could consider selling a portion, maybe 25%–40%, of your portfolio and retaining a small portion for the long term of more than five years.
For high volatility growth stocks like Shopify, time-to-time profit booking and reinvesting in the dip can generate better returns.
