Is Shopify a Buy Now?

This year Nasdaq Composite Index It is up 37% (as of December 8), which is a particularly notable rise after the huge decline in 2022.

However, some companies such as Shopify (store 0.92%), which provided more rewards to investors. Amid the revival of growth technology stocks, their stock prices more than doubled in 2023.

Is this normal when prices skyrocket this much in such a short period of time? e-commerce stocks Is it worth adding to your portfolio right now? Let’s take a closer look at what investors need to know before making a decision.

Shopify’s Strong Momentum

Shopify has been on the rise over the past few weeks, thanks to a stellar third-quarter financial report that easily surpassed Wall Street expectations. The company reported revenue of $1.7 billion, up 25% from the previous year. Dilution adjusted Earnings per share (EPS) came out to $0.24. This is a significant improvement compared to the loss of $0.02 in Q3 2022.

Moreover, investors seemed very optimistic about Shopify’s guidance. Management expects overall sales to be mid-20% higher in 2023.

To be clear, Shopify’s growth, while still significant, isn’t even close to the gains the business achieved in previous years. For example, Shopify’s revenue grew 86% and 57% in 2020 and 2021, respectively. To its credit, the surge in e-commerce activity occurred during the height of the pandemic, when consumers were spending more time at home.

A sign that Shopify is generating more revenue from merchants can be seen in its attachment rate of 3.05%. This has been steadily increasing over the years, which is indicative of the value this business provides to its customer base as well as its ability to generate revenue from its activities.

Going forward, it is encouraging to see that online shopping still accounts for less than 16% of total retail spending in the United States. Shopify, the market leader in e-commerce platforms, is poised to continue benefiting from these secular trends.

Profit is important

While growth is an important part of the company’s story, the main reason the stock has performed so well is probably Shopify’s improving profitability. Like many of its tech peers, the company laid off a significant amount of its workforce earlier this year.

This leads to a more efficient organization. Shopify’s 7% Q3 operating profit margin This is proof that change is happening. In the same period last year, this margin was 25%.

And to scale its operations, Shopify sold its logistics division, freeing up capital that had previously been tied up in areas other than the company’s core competencies.

higher interest rates and inflation environment, investors appear to prioritize financial health and positive net income. This is a stark contrast to most of the past decade, when low borrowing costs led companies to spend aggressively and delay profitability. At least we know Shopify is moving in the right direction in this regard.

high praise

No thorough investment analysis is complete without considering the company’s valuation. Meanwhile, Shopify sale for price (P/S) multiple of 14 is still well below the high of 64 set in the fall of 2020 when the market was booming. But for growth-oriented investors, this could be reason enough to buy the stock.

But I am not one of these people. I think the current P/S ratio is still expensive. In fact, it is about 67% higher than at the beginning of this year, so you can clearly see investors’ optimism pouring in.

I believe this valuation will significantly accelerate Shopify’s growth and profits in the coming years. margin of safety. It is best to add the company to your watchlist and wait for a more attractive entry price.