The stock market rally, which began at the start of 2023, has allowed growth companies such as Shopify (TSX:SHOP) to stage a remarkable comeback. Shopify stock has more than tripled investor returns since January 2023, valuing the Canadian tech giant at a market cap of $204 billion.
Despite its market-beating gains in the last two years, the TSX tech stock trades 26% below all-time highs. So, let’s see if Shopify can continue to deliver outsized gains to shareholders and reclaim a fresh record high in 2025.
The bull case for Shopify stock
Founded in 2011, Shopify provides solutions that allow merchants to display, manage, market, and sell products through multiple sales channels, including web and mobile storefronts, physical retail locations, and social media storefronts. Using Shopify’s portfolio of tools, merchants can manage inventory, process orders and payments, leverage analytics and reporting, and manage transactions.
In the last 12 months, Shopify has reported revenue of US$8.2 billion, up from US$105 million in 2014. An asset-light model allows Shopify to benefit from economies of scale and high operating leverage. Its operating margins in the last four quarters have totalled 13.1%, up from less than 4% in 2023.
Moreover, Shopify’s free cash flow in the past year has totalled US$1.43 billion, up from $905 million in 2023. Its free cash flow margin has improved to 17.4% from 12.8% in this period.
Shopify sales are forecast to surpass US$12.5 billion in 2026, and if its free cash flow (FCF) margins improve to 25%, it will generate more than US$3 billion in FCF, making it a top investment choice right now.
Shopify stock surged over 20% in a single trading session following its third-quarter (Q3) results, where it reported revenue of US$2.16 billion and earnings of US$0.35 per share. Analysts forecast Q3 revenue at US$2.12 billion with earnings of US$0.27 per share.
Moreover, Shopify projects revenue to grow over 25% year over year in the current quarter, driven by strong holiday sales.
What’s next for Shopify stock?
To date, Shopify has onboarded more than two million merchants on its platform. While it will continue expanding its customer base due to a widening product portfolio, Shopify is poised to derive incremental sales from existing merchants.
Shopify new feature launches are focused on making it easier for merchants to run their business efficiently. For instance, Shopify Flow is a low-code workflow automation app that empowers merchants to build custom automation based on custom data. This tool allows users to easily update products, process customer form submissions, and edit orders.
Additionally, the Shopify Inbox leverages artificial intelligence to make it easier to respond to customer queries. The company also rolled out Shopify Tax, which allows users to automate the preparation, filing, and remittance of sales tax returns.
Shopify should benefit from multiple secular tailwinds, including the growth of e-commerce sales globally. Focusing on cost optimization will increase profit margins, driving earnings growth for the company.
Priced at 80 times forward earnings, Shopify stock trades at a lofty multiple. However, its adjusted earnings are forecast to grow by over 40% annually over the next two years, which allows it to command a premium valuation.
