3 Reasons Shopify Stock is a Buy: Beyond the 21% Surge in a Month
Shopify SHOP shares have appreciated 21.1% in the past month, outperforming both the Zacks Computer & Technology sector and the Zacks Internet Services industry. Over the same timeframe, the sector and industry have gained 6.3% and 9.8%, respectively.
The outperformance in SHOP’s shares can be attributed to the positive impact of the 50-basis-point rate cut by the U.S. Federal Reserve in September. The higher-than-expected cut is expected to have aided the small and medium businesses, which form Shopify’s major merchant base.
The growing investor interest in Shopify stock can be attributed to the upcoming holiday season. It had a blockbuster 2023 season as merchants hit a record $9.3 billion in sales over Black Friday & Cyber Monday weekend, up 24% over 2022. We expect the momentum to continue this year.
One Month Performance
Image Source: Zacks Investment Research
SHOP Shares Ride on Growing Merchant Base
Shopify’s expanding merchant base is noteworthy. This has been driving its Gross Merchandise Volume (GMV), which surpassed $1 trillion cumulatively. Offline business surpassed $100 billion in cumulative GMV since the launch of Shopify POS.
Merchant-friendly tools like Shop Pay, Shopify Collective, Shopify Audiences, Shopify Capital and Shop Cash offers are helping it win new merchants regularly in a challenging economic environment.
In the second quarter of 2024, Shop Pay processed $16 billion in GMV and accounted for 39% of SHOP’s Gross Payments volume (GPV). In the reported quarter, GPV grew to $41.1 billion, constituting 61% of GMV processed.
Shopify recorded the highest-ever B2B GMV month with a 140% year-over-year increase fueled by the growth of Plus merchants.
Shopify plans to improve the operating efficiency of its point-of-sale offering by introducing features, including a new remote smart grid layout editor, omnichannel return rules, and the ability to stack multiple discounts at checkout, making it easier for merchants to customize their promotional strategies.
Expanding Enterprise Footprint to Aid SHOP Stock
Shopify’s expanding enterprise clientele is a key catalyst. The growing number of companies like QVC, Barnes & Noble, Away, TravisMathew, Topps, Vince Camuto, Casper, and Toys “R” Us on its platform is noteworthy. These brands are launching online and offline with Shopify, which, on a combined basis, includes more than 130 locations across four regions.
Integration of Shop Pay Installments into the point-of-sale terminal and general availability of Pro makes it easier for merchants to discover and engage their customers. This is expected to further boost its footprint among enterprises.
Shop Pay offers comprehensive order tracking via the Shop app and allows buyers to earn Shop Cash redeemable for purchases within the app. This builds greater customer engagement and unlocks additional opportunities for Shopify’s enterprise customers to reach their customers.
Rich Partner Base to Aid SHOP Stock’s Prospects
An expanding partner base that includes Oracle, TikTok, Snap, Pinterest, Criteo, IBM, Cognizant, Alphabet GOOGL, Amazon AMZN, Target TGT, Manhattan Associates, COACH and Adyen is expected to expand its merchant base further.
Alphabet division YouTube recently expanded its partnership with Shopify to bring more brands for its YouTube Shopping affiliate program.
Shopify’s strategy to focus on the core business by divesting the logistics business has been a noteworthy development. Its partnership with Amazon allows Shopify merchants to use the former’s massive fulfillment network. The relationship with Target also strengthens SHOP’s footprint.
Shopify’s expanding international footprint is noteworthy. In the second quarter, it launched a point-of-sale terminal in eight additional countries, contributing to an impressive 2.4 times increase in GMV.
Earnings Estimate Revisions Trend Higher for SHOP
The Zacks Consensus Estimate for Shopify’s 2024 earnings is pegged at $1.12 per share, up by a penny over the past 60 days and indicating 51.35% year-over-year growth.
The consensus mark for SHOP’s revenues is currently pegged at $8.62 billion, indicating year-over-year growth of 22.16%.
Shopify’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 31.17%.
Shopify Inc. Price and Consensus
Shopify Inc. price-consensus-chart | Shopify Inc. Quote
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Shopify Stock is Overvalued
The Value Score of F suggests a stretched valuation for Shopify at this moment.
SHOP stock is trading at a premium with a forward 12-month Price/Sales of 10.72X compared with the industry’s 5.84X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
Conclusion
Shopify is benefiting from strong growth in its merchant base, as well as expanding its international footprint. Its focus on improving enterprise footprint is a key catalyst.
SHOP stock is expected to benefit from an anticipated strong sale in the upcoming holiday season as a rate cut is expected to boost discretionary spending. Strong growth prospect justifies a premium valuation.
Shopify currently has a Zacks Rank #1 (Strong Buy), suggesting that it may be wise to enter the stock right now. You can see the complete list of today’s Zacks #1 Rank stocks here.
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