Why Shopify Stock Is Up 21% in August

Shopify (STORE -3.79%) The stock rose 21 percent in August, according to data from S&P Global Market Intelligence. It delivered an outstanding second-quarter earnings report, and Shopify is a popular stock making big moves based on performance.

Capitalizing on its immense opportunity

Shopify is a global leader in e-commerce and is leveraging its vast and superior capabilities to gain market share in a growing industry. It has gone through some ups and downs in recent years, succeeding through accelerating pandemic demand and then vice versa. It hasn’t been an easy road to travel, but Shopify has continued to report strong growth throughout.

Investors were concerned about guidance for further slowdowns, but Shopify posted a beat in the second quarter, in addition to many other positive updates. Revenue rose 21% year-over-year, or 25% adjusted for the sale of the logistics business last year.

Shopify makes money in two ways. It has subscription packages and processes payments on its platform. The payment processing business is much larger, accounting for 75% of total revenue in the second quarter. It is also growing as a percentage of gross merchandise volume (GMV) processed on the platform, from 58% last year to 61% this year. Subscription solutions revenue continues to grow at a strong pace, up 27% year over year.

Making his business work

There are two concerns investors should think about with Shopify stock. The first is profitability. Shopify has made great strides in becoming profitable, but it’s not yet supported. As revenues rise, profits have only tentatively followed.

Management has taken clear steps to reduce costs and increase profits. It cut jobs when demand fell and sold a logistics company called Deliverr, which it had recently acquired but was turning a profit. It is still feeling the positive impact of the sale and expects more good news on that front. However, they are still working to generate profitability.

He looked good in the second quarter. Operating income was $241 million and net income was $171 million, both up from last year’s severe sales-related declines. Free cash flow tripled year over year to $333 million.

The second concern is evaluation. Shopify stock trades at a price-to-sales ratio of 12, which is a rich valuation. It shows how much confidence investors have in this stock, but it also leaves little room for error. That makes it risky.

The likelihood is that Shopify will continue to grow at a steady pace and become sustainably profitable. But some of that growth is already baked into the price, and risk-averse investors may want to look elsewhere.