Yesterday, the Bank of Canada slashed its benchmark interest rates by 50 basis points to 3.25%. It was the fifth consecutive interest cut since June. However, the central bank has indicated that future interest rate cuts would be gradual. The slashing of interest rates appears to have raised investors’ confidence, driving the broader equity markets higher. The S&P/TSX Composite Index rose 0.6% yesterday while trading at 22.4% higher for this year.
Amid falling interest rates and improving investors’ optimism, you can buy high-growth stocks to earn superior returns. Meanwhile, I am bullish on Shopify (TSX:SHOP), which has reported a solid third-quarter performance and offers healthy growth prospects. Let’s look at its third-quarter performance.
Shopify’s Q3 performance
Shopify posted a solid third-quarter performance last month, with its GMV (gross merchandise value) growing by 24% year-over-year. It was the fifth consecutive quarter of over 20% growth. Solid same-store sales, expansion of its customer network, and higher international and point-of-sales growth drove its GMV. Along with the expansion of its GMV, increased subscription revenue, rising payment penetration, and solid growth in the international markets drove its topline. The company posted revenue of $2.2 billion during the quarter, representing 26.1% year-over-year growth.
Gross profits grew 24% to $1.1 billion amid topline growth. However, its gross margin declined by 90 basis points to 51.7% due to increased revenue from lower-margin payments. The company’s operating expenses increased by 7.2% amid increased compensation due to higher pay revisions and hiring for key roles within the departments of sales and R&D (research and development). However, as a percentage of total revenue, its operating expenses declined from 45.4% to 38.6%, thus driving its operating income, which rose 132% to $283 million.
Moreover, Shopify generated $421 million of free cash flows, representing 19% of its total revenue – a 300 basis point increase from the previous year’s quarter. Now, let’s look at its growth prospects.
Shopify’s growth prospects
The growth in entrepreneurship and commerce has created multi-year growth potential for Shopify. Meanwhile, the company continues to launch innovative products that meet the needs of different merchant segments, sizes, geographies, and channels. The company’s products help businesses improve operating efficiencies, boost sales, and expand to new markets or countries.
It also recently expanded its Tap-to-Pay feature for Shopify point-of-sale across Australia, Germany, the Netherlands, and the United Kingdom to deliver a seamless customer experience. It also introduced offline payment support, allowing uninterrupted sales even during network disruptions. Along with these initiatives, the company focuses on delivering a personalized customer experience, which is gaining traction among mid-market merchants.
Moreover, Shopify recently launched Shopify Finance, a comprehensive financial tool package that allows access to capital, balance, and bill payments. The growing adoption and penetration of its Payment platforms should boost its GPV (gross payment volume). Considering all these factors, I believe its growth prospects look healthy.
Investors’ takeaway
Amid solid financials and improving cash flows, Shopify has returned over 60% this year – outperforming the broader equity markets. The substantial increase in its stock price has driven its valuation higher, with the company currently trading 14.9 and 83 times its projected sales and earnings for the next four quarters. Although its valuation looks expensive, I believe it’s justified due to its solid financials and healthy growth prospects. So, investors with an investment horizon of over three years could accumulate the stock to earn superior returns.
