Written by Christopher Liew, CFA at The Motley Fool Canada
The TSX produced a technology industry darling in 2019 that dominated Canada’s most important stock exchange in 2020. Shopify (TSX:SHOP) became a superstar on the COVID-fueled e-commerce boom. The stock averaged a two-year return of 185.94%, but lost 74.8% in 2022.
If you were investing today, you wouldn’t say Shopify is a phenomenal Canadian stock. At $75.41 per share, the tech stock is down 26.9% year-to-date and hasn’t been this cheap in years. What’s more, the current share price is 94.97% below the $1,500.33 it was at the start of January 2021.
In April 2022, Shopify announced a 1:10 stock split because management deemed the price too high for ordinary investors. The stock split occurred on June 29, 2022, although the price was already considerably low. Today, the market analysts’ price target for the next 12 months is between $107.97 (average) and $137.61 (high). However, besides the absurdly low price, there are other points you need to consider.
High-risk instead of low-risk investment
Some market observers claim that Shopify is not a low-risk investment, but a high-risk one. The e-commerce platform offers a recurring revenue model with strong growth potential, but profitability remains questionable. Harley Finkelstein, the president of Shopify, disagrees.
In 2023, total revenue (subscriptions and merchant solutions) increased 26% year-on-year to $7 billion, while net income reached $132 million, compared to a net loss of $3.5 million in 2023. Its chief financial officer Jeff Hoffmeister said Shopify achieved a free cash flow (FCF) margin of 21% and achieved 30% revenue growth in the fourth quarter (Q4) of 2023, taking into account the divestiture of the logistics business.
Finkelstein added, “2023 has been an incredible year for both Shopify and our merchants. Our strong fourth quarter and year-over-year results are a powerful testament to the progress we’ve made in building fast, reliable, and consistent software for merchants of all sizes.”
Other business highlights from last year include an expanded unified commerce operating system that helps merchants launch, scale, and grow their businesses. Shopify also launched Shopify Magic with artificial intelligence (AI)-based features and an AI-powered commerce assistant called Sidekick. The company launched new payment hardware and enterprise POS terminals in the U.S. and Canada.
Strong start into 2024
At the end of 2023, management forecast revenue growth in the low 20s year-over-year. In the first quarter of 2024, revenue and monthly recurring revenue increased 23% and 32%, respectively, to $1.9 billion and $151 million, respectively, over the first quarter of 2023. While FCF increased 169.77% year-over-year to $232 million, Shopify suffered a net loss of $273 million.
Still, Finkelstein said, “We are building a 100-year-old company and will continue to remain extremely flexible and seize every opportunity that accelerates the success of our dealers, enables us to continue to build best-in-class products and improve operating efficiencies for better returns.”
let’s wait and see
Investors can wait for Shopify’s Q2 2024 results before investing. The Canadian company is competitive but faces stiff competition from Chinese rivals like PDD Holding’s Temu. More importantly, Shopify needs to show consistent earnings growth to regain its lost glory.
The post It’s Time to Buy: 1 Phenomenal TSX Stock That Hasn’t Been This Cheap in Years appeared first on The Motley Fool Canada.
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further reading
Fool contributor Christopher Liew does not own any stocks mentioned. The Motley Fool owns shares of Shopify and recommends the company. The Motley Fool has a disclosure policy.
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