Shopify is riding strong revenue growth. Is it too late to buy stocks?

2024 was a tale of two quarters for Shopify (STORE 1.09%). Shares of the e-commerce company fell in May after it reported first-quarter results. Analysts had expected 19.5% growth in the second quarter, and management’s “teenage percentage rate” guidance disappointed investors.

But this week, the stock rallied after second-quarter results showed a 21 percent rise in revenue, beating management’s previous outlook and analysts’ estimates.

If all of this sounds a little silly, you’re not alone. However, in the short term, the market is very much about expectations, and the market’s reaction to Shopify’s earnings over the past two quarters shows how much expectations play into earnings timing.

All that aside, let’s take a closer look at Shopify’s latest results before considering the stock as a long-term buy.

Strong results and insights

In Q2, Shopify grew revenue 21% year over year to $2.05 billion, or 25% when adjusted for the sale of its logistics business.

Gross merchandise volume (GMV) rose 22% to $67.25 billion, while gross payment volume rose 30% to $41.10 billion as more merchants took advantage of the offer The company’s Shopify Payments. Total merchant solutions revenue rose 19% to $1.48 billion.

Meanwhile, subscription revenue rose 27% to $563 million on higher prices and more merchants using its platform.

Gross margin also rose from 49.3% to 51.1%, helped by higher subscription plan prices and Shopify’s exit from its lower-margin logistics business.

The company generated $333 million in free cash flow in the quarter. It ended the period with net cash and marketable securities of $4.10 billion.

Looking ahead, Shopify is calling for third-quarter revenue growth in the “low to mid-twenties” range. Gross margin should also increase 50 basis points from Q2, while free cash flow margin remains unchanged. Analysts had previously expected a 21% increase in revenues in Q3.

Image source: Getty Images.

Is it too late to buy stocks?

As previously mentioned, Shopify’s guidance lowered its stock when it reported Q1 results. But in reality, its Q2 and Q3 revenue growth guidance is nearly identical when factoring in the sale of its logistics business. Even in May, management called for “mid- to mid-twenties” growth in the second quarter, when adjusting for the sale. And now that it has exited its logistics divestment, the sale will not affect Q3 revenue growth.

What this means is that Shopify’s underlying revenue growth remains steady in the 20% range. Given recent concerns about a recession and weak consumer spending, that’s a solid growth rate. Meanwhile, Shopify can still take advantage of opportunities in brick-and-mortar retail, B2B commerce, international marketplaces, and its Shop app. The company continues to push into the enterprise space as well, signing up a number of well-known brands in the last quarter.

Shopify also continues to attract merchants to its payments services with GPV as a percentage of GMV in the second quarter increasing 350 basis points year-over-year to 61%. This should continue to be a growth engine for the company moving forward.

Following the stock price rally, Shopify now trades at a forward price-to-sales (P/S) ratio of 8.6 (and 11.7 times trailing earnings). Given its steady top-line expansion, that’s still a relatively attractive valuation and well below where the stock was trading a few years ago.

Data by YCharts.

It’s not too late for investors to buy the stock, assuming they approach it with a long-term mindset. That said, given the amount of volatility that Shopify sees on a regular basis, I recommend that investors take a starting position and build their holdings with a dollar cost averaging strategy.