Many tech stocks have fallen this year, but some, such as Shopify (TSX:SHOP)(NYSE:SHOP), have built stronger organizations during this volatile period since covid turned on online commerce. The e-commerce platform’s services continue to expand into offline payments and logistics, providing a massive growth ramp into the future. My investment thesis is very bullish on the Shopify opportunity, even though Shopify stock valuation isn’t the best after this big gain.
The key to Shopify’s Q3 2022 results was not the revenue beat but the company’s ability to grow revenues at a 22% clip. Shopify’s revenue increased to $1.37 billion, up from $391 million in the third quarter of 2019. During that time, the company experienced 52% annualized growth.
SHOP stock is now trading near its lows as the market’s valuation has normalized in the last year following Shopify’s insane valuation when it traded above $150. Surprisingly, the stock would likely trade higher if it weren’t for lack of profits, despite the limited losses providing the traditional playbook for growth investors.
The following are some new products that the company expects to drive future growth:
- Shopify Collabs – this product connects brands and creators to generate 50 million organic social impressions in two months.
- Shopify Markets – enables merchants to identify, set up, launch, optimize, and manage their international markets from a single storefront and has been used by over 175,000 merchants since its Q1 launch.
- Shopify Markets Pro – a cross-border solution built on top of Markets that will be available in early access beginning in mid-September.
- Shopify Payments/Capital/Shipping – now available in new global markets.
- Shopify Fulfillment Network – covers three complex stages of a merchant supply chain as inventory moves from port to porch: freight, distribution, and fulfillment.
- POS Go – a first-of-its-kind mobile hardware device for POS transactions from curb to counter.
The most exciting opportunity is within the Shopify Fulfillment Network, which the recent acquisition of Deliverr has strengthened. The company can now provide merchants with a complete supply chain solution that includes logistics from “port to porch.”
Shopify is working hard to resolve numerous issues for merchants. These solutions come at a cost, but the company isn’t losing a lot of money quarterly, and Shopify has nearly $5 billion in cash on hand to make investments. After all, despite adding the unprofitable Deliverr business and aggressively investing for the future, particularly in logistics, the e-commerce infrastructure company only lost $30 million in the quarter.
Shopify forecasted a similar operating profit loss for the fourth quarter. If the company can maintain 20%+ sales growth, investors will be rewarded with massive investments in new products while the infrastructure platform absorbs only minor quarterly operating losses.
The impressive growth in Merchant Solutions takes rates is a crucial driver of growth and demonstrates how new products propel growth. In Q3 2022, the rate was 2.14%, while GMV increased 11% to $46.2 billion.
Shopify Stock: Stuck in the $30s
Despite the positive quarterly results, Shopify remains in the $30s for one primary reason. Since May, the stock has traded in this range, providing a solid foundation for anyone looking to invest here.
The main issue is that Shopify isn’t particularly cheap at the lows, with the stock still trading at 6.5x revenue targets for 2023. The challenging economic environment, combined with concerns about slowing e-commerce growth, jeopardizes the projected 24% growth rate for next year.
Investors should look for stock weakness rather than chase Shopify after an 18% gain. A retest of the lows would undoubtedly provide an opportunity to own the company for the long-term growth that the fantastic new products will generate; otherwise, investors should be cautious about chasing the stock here, as it is likely to run into strong resistance around $40.
The main takeaway for investors is that Shopify is a stock worth pursuing now. The stock is already priced for a normal economic environment, but the world may be entering a recession. Investors should buy SHOP stock on weakness in the future due to the impressive suite of services provided to merchants, with the business running on all cylinders despite macro issues.
Featured Image- Unsplash @ robertocortese