Shopify (NYSE: SHOP) stock has likely impressed its shareholders with a nearly 60% gain over the last year. Such gains might even make investors forget that its current price is still 35% below the stock's peak in November 2021.
Nonetheless, a greater focus on its software business and the continuing growth of e-commerce have got the company back on track. Hence, the stock could continue to benefit investors amid its recovery.
The state of Shopify's stock
Throughout its history, Shopify has stood out among e-commerce platforms. Its ability for no-code site development and the flexibility to customize websites drew entrepreneurs to Shopify, and the company's emphasis on website speeds reduced the possibility that website issues would hamper sales for its customers.
Moreover, Grand View Research forecasts a compound annual growth rate of 19% for the e-commerce industry through 2030. This should mean more merchants turn to Shopify as more retail sales businesses move online.
Shopify has further emphasized its competitive advantage with ancillary services such as managing payments, monitoring inventory, or supporting email marketing campaigns. This part of the business, called merchant services, accounts for the majority of Shopify's revenue.
However, an effort to expand merchant services into logistics brought about high expenses and ongoing losses, which contributed to a massive stock price decline in 2022. That led to Shopify reversing course and selling that business. After selling the logistics enterprise and suffering through some impairment charges, Shopify has again become profitable and stock price growth has returned.
Shopify's financials
Admittedly, Shopify has not grown as fast as it did before or during the pandemic when revenue growth either closely matched or, at times, exceeded the 50% level. Furthermore, Shopify increased the prices for its services in 2023, so its not clear how that affected customer churn.
Nonetheless, the company's revenue for the first nine months of 2024 of $6.1 billion increased 23% yearly. This closely matches the 25% growth forecast for this year and the 22% predicted in 2025.
Additionally, Shopify has reduced its operating expenses slightly in 2024. Investors might also remember that the $1.3 billion impairment from the sale of the logistics business in 2023 led to losses in that year despite a $1 billion gain from its equity investments. Amid those developments, its $726 million net income for the first three quarters of 2024 represents a vast improvement from the $525 million loss in the same year-ago period.
Also, considering Shopify's status as a growth stock, its valuation may not necessarily deter prospective shareholders. Indeed, the stock has grown considerably since it briefly fell below $24 per share in the 2022 bear market.
Still, despite the nearly fivefold increase over that period, its valuation may have been less affected than some might assume. Indeed, the price-to-earnings (P/E) ratio of 107 is high due to its recent turn to profitability.
However, while its price-to-sales (P/S) ratio of 18 is not cheap, it is lower than many other growth stocks. Moreover, it is far below pandemic levels when the P/S ratio was routinely above 40. Investors should also remember that the company's rising revenue places downward pressure on the sales multiple, likely leading to an increasing stock price as its financials continue to improve.
Investing in Shopify stock
Ultimately, Shopify stock appears positioned to return to its 2021 peak and set new record highs. Even though growth rates have slowed from a few years ago, Shopify's ecosystem positions it to capitalize on its growing industry.
The software as a service (SaaS) stock is positioned to capture growth in the e-commerce industry, and even price increases have not deterred its customer base.
Furthermore, while Shopify's valuation has risen, continuing growth will likely put downward pressure on its sales multiples, making it increasingly likely the stock price will increase over time. Such factors strongly indicate that investors should consider buying while the stock still sells at a discount.
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Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
