Shopify gains 21.5% in one month: how to invest in SHOP stock? - August 22, 2024

Shopify (SHOP – Shares of Zacks Computer & Technology have returned 21.5% over the past month, outperforming both the Zacks Computer & Technology sector and the Zacks Internet Services sector. Over the same period, the sector and the sector have lost 1.2% and 6.4%, respectively.

This outperformance can be attributed to Shopify’s strong Q2 2024 results, which primarily benefited from an expanding merchant and partner base.

Total revenue jumped 20.7% year over year to $2.05 billion, surpassing the Zacks Consensus Estimate by 2.03%. Adjusted for the sale of the logistics business, revenue jumped 25% year over year.

Adjusted second-quarter 2024 earnings of 26 cents per share handily surpassed the Zacks Consensus Estimate of 30% and jumped 85.7% year over year.

SHOP Stock Should Benefit From Strong Q3 Guidance

Shopify has given solid guidance for Q3 2024. The company expects revenue growth in the range of 20% to 25% year over year. Gross margin is expected to increase by 50bps year over year.

One month performance

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for third-quarter 2024 revenue is pegged at $2.10 billion, indicating growth of 22.69% from the prior year. The earnings consensus is pegged at 27 cents per share, up 17.4% over the past 30 days and suggesting growth of 12.5% from the figure reported in the prior year quarter.

Strong Trader Base Favors SHOP Stock’s Long-Term Outlook

Shopify’s long-term outlook is strong, given its growing merchant base and expanding partner base.

Shopify’s latest updated editions include over 150 new product and feature updates. SHOP has surpassed $1 trillion in cumulative gross merchandise volume (GMV), while its offline business has surpassed $100 billion.

In Q2 2024, offline GMV jumped 27% YoY with new multinational brands like EVEREVE and MAJOURI. These brands are launching online and offline with Shopify, which on a combined basis includes over 130 sites across four regions.

Merchant-friendly tools like Shop Pay, Shopify Collective, Shopify Audiences, Shopify Capital, and Shop Cash help it consistently win new merchants in a tough economic environment. Shopify’s platform is widely used by small and medium-sized businesses that are suffering from persistent inflation.

In Q2 2024, Shop Pay processed $16 billion in GMV and accounted for 39% of SHOP’s gross payment volume (GPV). In Q2, GPV reached $41.1 billion, representing 61% of GMV processed.

Shopify recorded its highest B2B GMV month ever with a 140% year-over-year increase, fueled by growth in Plus merchants in Q2.

Shop Pay Installments integration into the POS terminal and the general availability of Pro make it easier for merchants to discover and engage their customers.

Shopify plans to improve the operational 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 Partner Base: A Key Catalyst for SHOP Stock

An expanding partner base that includes TikTok, Snap, Pinterest, Criteo, IBM, Cognizant, Alphabet (GOOGLE – Free report), Amazon (AMZN – Free report), Target (TGT – (Free Report), Manhattan Associates, COACH and Adyen are expected to further expand their merchant base.

YouTube’s Alphabet division recently expanded its partnership with Shopify to offer more brands to its YouTube Shopping affiliate program.

Shopify’s strategy to focus on its core business by divesting its logistics business is a notable development. Its partnership with Amazon allows Shopify merchants to tap into the former’s vast distribution network. The relationship with Target also strengthens SHOP’s footprint.

Shopify’s international expansion is remarkable. In Q2, the company launched a point-of-sale terminal in eight additional countries, contributing to an impressive 2.4x increase in GMV.

Shopify Stock Is Overvalued

The D Value Score suggests a high valuation for Shopify at present, making it a risky bet for risk-averse investors.

SHOP stock is trading at a premium with a 12-month forward price-to-sales ratio of 10.10X compared to the Zacks Internet Services industry’s 5.44X.

Price/Sales Ratio (F12M)

Image Source: Zacks Investment Research

However, the technical indicator is bullish for Shopify as shares are trading above the 50-day moving average, indicating strong upward momentum.

SHOP shares trade above 50-day moving average

Image Source: Zacks Investment Research

Conclusion

Shopify is enjoying strong growth in its merchant base. The expansion of its back-office solutions for merchants into more countries strengthens SHOP’s international footprint. While the current valuation is high, the long-term growth prospects are hard to ignore.

However, difficult macroeconomic conditions and persistent inflation are a source of concern.

Shopify currently has a Zacks Rank #3 (Hold), which suggests that it might be wise to wait for a more favorable entry point for the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.