Is Shopify Stock Finally a Buy?

Shopify (STORE 2.42%) Shares have fallen 26% since releasing phenomenal second-quarter earnings results on Aug. 7, but are still down more than 50% over the past three years. There’s been a lot going on at Shopify that’s keeping investors on their toes. Let’s see where the business is today and whether or not it’s a good time to buy the stock.

Growth was better than expected

Let’s take a step back and give some context to the recent earnings report. Offering white-label e-commerce services to business customers, Shopify has been a leader in website creation and e-commerce solutions for many years. It offers complete packages for any small business to get online and start selling fast with design, payments, data analysis and more. As a leader in this niche, its stock was already rising steadily before the pandemic, but as revenue increased with the onset of COVD-19, Shopify’s stock rose as well.

The pandemic-fueled growth didn’t last, but the company continues to grow at a robust pace and came in ahead of second-quarter guidance. Revenue was up 21% year over year. Gross merchandise volume (GMV), which is the volume of sales it processes through its customers’ stores, increased by 22%. This is a strong showing in a macroeconomic environment hampered by inflation and recession fears.

Shopify has done a great job expanding its offerings with unique solutions for enterprise customers, physical payment services, business-to-business services, and cross-border transactions. These non-core services drive growth. For example, offline sales grew 27% year-over-year in the second quarter, and business-to-business GMV increased 140%.

Most of Shopify’s revenue comes from processing payments, and as more customers join the platform, the percentage of GMV it processes has grown, including a 350 basis point increase to 61% in the second quarter.

Still working towards sustained profitability

One thing Shopify doesn’t offer customers is logistics, but that’s not for lack of trying. It acquired a logistics operation called Deliverr in 2022 to support its efforts to build a complete, end-to-end service for customers and become a true competitor for Amazon. However, it was far too soon and management announced in May 2023 plans to sell its logistics arm and focus on core services. It also cut jobs to bring the business more in line with demand and become more cost-efficient.

These moves are paying off. Operating income was $241 million in the second quarter, with a margin of 11.8%, and net income was $171 million. Free cash flow rose from $97 million a year ago to $333 million.

While those numbers were strong, Shopify doesn’t have a proven track record of being profitable, and the benefits of its exit from the logistics business are still materializing.

This graph provides a visual representation of what happened.

Data by YCharts.

Revenue continues to grow at a steady pace, but operating and net income have been less consistent. These numbers are building, and as Shopify continues to scale without logistics dragging down profitability, it’s a trend that’s likely to continue.

Shopify stock is still expensive

Shares of Shopify are trading at a price-to-sales ratio of nearly 12, which is close to its average over the past two years. Its forward P/E ratio is 52.

Investors with a long time horizon and a stomach for risk may be interested in buying Shopify stock. It’s expensive, but stocks often command a premium when the market assesses its underlying growth and opportunities. With the company moving in the right direction, this growth stock can continue to rise over the long term. However, expect volatility along the way.