Shopify stock faces more upside as growth accelerates

Shopify (SHOP), the third-biggest Canadian company after Royal Bank of Canada and Toronto Dominion Bank, is a leading firm that operates a Software as a Service (SaaS) solution. 

Its product helps companies and individuals create their e-commerce stores without doing the real coding. One can start his e-commerce store within a few minutes and reach millions of users from around the world.

Shopify has a leading market share in the industry. Some of the other top competitors are companies like BigCommerce, Wix, Squarespace, Magento, and WooCommerce. 

Shopify makes money in several ways. It charges customers a monthly fee to host their e-commerce platforms. Shopify also makes money by charging its customers a fee whenever a purchase is made. Also, it charges its customers for its logistics and its Point of Sale (PoS) solutions.

Shopify’s business has done well over the years as its annual revenue has jumped from over $1.57 billion in 2019 to over $7 billion in 2023. Most recently, it has soared from this month’s low of $48.6 to $71.59. Its HypeIndex score has risen to 90%.

Shopify HypeIndex

Positive hype

• Shopify’s business is still growing, as evidenced by its second-quarter financials. Its Gross Merchandise Volume (GMV) rose by 22% in the second quarter to over $67.2 billion even as consumer spending slowed in most companies. 

• Its quarterly revenue rose by 21% to over $2.0 billion, helped by its all business segments. Subscription revenues rose to $563 million and its merchant solutions. 

• Analysts are optimistic about Shopify’s business, with the average revenue estimate for the year expected to come in at $11.84 billion, a 22.7% increase from 2023. They also expect the company’s revenue will hit $14.27 billion in 2025. 

• Shopify has a long track record of doing better than analysts' estimates because it tends to be highly conservative. 

• Some of the most bullish analysts on Shopify are RBC, JMP Securities, Citigroup, Barclays, and Deutsche Bank. The average stock target is $108, up from the current $71.59, meaning 

• Shopify has the biggest market share in the e-commerce industry, where it serves some of the top companies like Allbirds, Gymshark, Leesa, and Kylie. It has a big moat that is hard to penetrate since offerings like Wix and Squarespace have fewer features.

• Shopify has a room to grow its margins when it moves from the current growth phase. It has gross margins of 51% and net income margins of 16%. In the future, it could get to Adobe’s gross margins of 88% and its net margin of 24%.

• It has grown its margins in the past through layoffs. In 2023, it laid off over 2,000 staff, a move that, while sad, helped bring its gross margins above 50%.

• Shopify has a solid balance sheet with over $5 billion in cash and no debt. 

Negative hype

• Shopify is a highly overvalued company as it has a market cap of over $92 billion and an estimated 2025 annual revenue of $14 billion. This gives it a price to forward sales multiples of 6.5, which is not cheap. Bulls argue that Shopify deserves a premium for its market share. 

• Shopify has little room to add big retailers, who bring in the vast of its revenue in the future because most of the potential customers have their e-commerce software providers. 

Summary of Shopify stock

Shopify stock chart

Shopify stock plunged to a low of $48.60 on Monday last week as most stocks dropped amid the Japanese yen carry trade unwinding fears. It formed an island chart pattern, which is often seen as a sign of a bullish reversal. 

The stock has now bounced back by almost 50% and is hovering at its highest point since July. It has also jumped above the 200-day and 50-day moving averages and the two could form a golden cross pattern.

Therefore, technically, there are signs that the stock will continue rising as buyers attempt to retest the year-to-date high of $91.40, which is about 28% above the current level.

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