1 Growth Stock Down 55% to Buy Right Now

If you’re looking for a low-cost growth opportunity, look no further Shopify (STORE -1.91%). Although the stock is up more than 200% from its late-2022 low, it’s still down 55% from its 2021 peak. More importantly, it’s currently blown higher for all the right reasons .

Here’s everything you need to know and why it could be a great addition to your portfolio.

Shopify gives online sellers what they want more and more

If you’re not familiar with it, Shopify helps businesses of all sizes establish an e-commerce presence. Although platforms like eBay (NASDAQ: EBAY) and Amazon (NASDAQ: AMZN) are a simpler means of connecting with customers online, these third-party platforms lack the flexibility and customization that merchants increasingly want. They can also be relatively expensive to use.

Then there’s the more philosophical motivation to avoid using e-commerce middlemen like Amazon or eBay and instead do your own thing. That is, using these online malls can introduce a seller’s customers to his competitors. By giving merchants a means to sell directly to consumers, on the contrary, Shopify allows businesses to build real relationships and drive repeat business.

And the numbers say online sellers are increasingly loving the option. Users of the company’s online selling tools sold $67.2 billion worth of goods and services in the second quarter of the year, up 22% year over year, extending growth trends that are expected to continue into the future near. The company’s own revenue reached $2 billion for the same quarter, growing as much. This top line includes a combination of subscriptions, transaction processing fees, and some advertising in its app store.

Perhaps most importantly, although the swing to profit seen during and because of the COVID-19 pandemic has since been reversed, Shopify is making progress back into the black. It turned a real profit in Q2 of this year, in fact, reporting net income of $170 million.

SHOP revenue data (quarterly) by YCharts

Analysts expect these profit margins to widen in the future.

Rising tide

The heart of the argument for buying Shopify stock while it’s still cheap, however, isn’t about the company itself — it’s already proven to be able to deliver what merchants increasingly want. Rather, the bullish argument is rooted in the maturing e-commerce market, which plays right into Shopify’s hand.

As of its most recent appearance, the PYMNTS market research team reports that eight out of every 10 small or medium-sized businesses in the United States use at least one online channel for promotional purposes, with about the same number using purpose-built e-commerce technology.

On the surface, this seems like a potential problem for Shopify’s continued growth. If most of your leads are already online, they won’t sign up to use Shopify’s services again.

These figures, however, leave out a crucial detail regarding the future of online shopping. That is, while these companies may already be managing an online presence, most of them also believe that most of their future revenue growth will come from their e-commerce operations…

…which it most likely will be. For all the growth the world’s e-commerce industry has already experienced, most shopping is still done offline, in person. The US Census Bureau reports that only 16% of US retail spending is currently online (and let’s assume a similar figure for outside the US). This leaves an enormous amount of room for e-commerce to continue to grow at the expense of brick-and-mortar.

And this it is growth. After growing by 7.6% last year, FTI Consulting predicts the nation’s e-commerce industry will expand another 9.8 percent this year. However, this growth still leaves online shopping at just a fraction of the size of traditional retail. Let us again assume that comparable growth rates apply abroad.

Connect the dots. This is a huge wave of growth for Shopify.

If you love Shopify inventory, don’t delay

So why then is this stock still down 55% from its 2021 high? In the simplest terms, it is the unique circumstances of the time.

Shopify’s stock has unsurprisingly surged during and because of the COVID-19 pandemic. Once the dust settled and retail trading began to return to normal, however, the market recognized that it had given this ticker too much, too fast. Investors corrected the mistake in 2022, but they probably overcorrected. There’s a reason the stock has recovered from that low, in step with the company’s continued growth. However, there is still much more profit potential.

The analyst community does not exactly agree with this optimistic assessment. While about half of that crowd sees the name as a strong buy, just under half see Shopify stock as just a hold. The consensus price target of $80.22 is also slightly below this ticker’s current price.

Don’t sweat their lackluster look too much, though. That caution is largely rooted in near-term valuation concerns that probably won’t apply in a few years, when Shopify has much more scale than it does now. That’s the bottom line that current buyers of the stock are probably factoring in here, and rightly so.

The bottom line? Shopify isn’t necessarily right for everyone’s portfolio. But it’s certainly a compelling prospect for most growth-oriented investors who can handle a little volatility.