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An increase of over 35% this year. Should you still buy Shopify stock now?

Shopping and e-commerce

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Written by Aditya Raghunath of The Motley Fool Canada

After a period of extreme turbulence in 2022, several technology stocks gained momentum in the first quarter (Q1) of 2023. For example, a drop of almost 80% from last year’s record highs Shopify (TSX:SHOP) shares are up 38% in the first three months of 2023.

Let’s see if Shopify stock can make a comeback in the coming months and end 2023 near record highs.

Bull Case for Shopify Stocks

Shopify is one of the largest e-commerce platforms in the world, ending 2022 with nearly $6 billion in sales, up from just $1.5 billion in 2019. The Covid-19 pandemic proved to be a tailwind for the Canadian tech giant as several companies had to establish an online presence despite nationwide lockdowns.

About 10% of U.S. e-commerce sales occurred through Shopify in 2022, and that number is likely to increase as the company continues to expand its portfolio of products and services. In recent months, Shopify has committed significant resources and capital to building a robust network of fulfillment centers, which should help optimize the supply chain of its merchant base.

Shopify has signed up over two million merchants and is quickly becoming an indispensable partner for most small and medium-sized businesses in North America.

Shopify has successfully expanded its ecosystem, allowing it to grow its revenue at an exponential rate. While initially generating most of its sales from subscriptions, its revenue is now driven by the merchant services industry. This business segment includes fulfillment center sales and additional services, including payments, digital marketing and inventory tracking.

This allows the company’s sales force base to easily access relevant data and implement strategies to improve customer engagement rates, which will translate into higher sales over time.

Shopify stock bear case

Shopify grew sales by 21% year-over-year in 2022. However, this was significantly lower than its growth rate of 86% in 2022 and 57% in 2021. Moreover, elevated levels of inflation and interest rate increases meant that the tech giant reported a net loss of $3.5 billion in 2022 compared to net income of nearly $3 billion in 2021.

Bay Street expects Shopify to grow sales 18.4% year-over-year to $9 billion in 2023 and 20% to $10.8 billion in 2024. By comparison, the company’s adjusted earnings are forecast to increase to $0. $.27 per share in 2024

So SHOP stock is valued at almost eight times 2024 sales and 240 times forward earnings, which is very expensive given the current macro environment. There’s a good chance that Shopify’s stock will fall significantly in 2023, especially if fears of a coming recession come true.

Stupid takeaways

Despite the massive drop in Shopify’s stock price over the past 15 months, Canadian tech stocks have returned nearly 2,000% to investors since their 2015 IPO. Shopify is unlikely to repeat its historic gains, but the company’s growing ecosystem, lower valuation multiple, and rising profit margins make it a top choice for long-term growth investors.

Analysts remain bullish on SHOP stock and expect its value to increase by more than 20% over the next 12 months.

Post Up over 35% this year. Should you still buy Shopify stock now? appeared first on The Motley Fool Canada.

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Fool Aditya Raghunath has no position in any of the companies mentioned. The Motley Fool covers and recommends Shopify. The Motley Fool has a disclosure policy.

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