Shopify Surges 60% Since April – Is It a Buy?

Strong Performance and Growth Prospects of Shopify

The Canadian equity markets have seen a significant rise, driven by easing geopolitical tensions in the Middle East, a more favorable macroeconomic environment, and hopes of progress in U.S. trade negotiations. The S&P/TSX Composite Index has surged 22.4% from its April lows. Among the standout performers, Shopify (TSX:SHOP) has delivered returns of over 61% during the same period. Despite recent gains, the stock is still trading 12.8% below its 52-week high, raising questions about potential buying opportunities.

Shopify's First-Quarter Performance

In May, Shopify reported a strong first-quarter performance, with its gross merchandise value (GMV) increasing by 23.8% year-over-year to $74.8 billion. This marks the seventh consecutive quarter of GMV growth exceeding 20%. The expansion of its merchant base, fueled by new customers added over the last four quarters, along with higher same-store sales growth among existing customers, contributed to this growth.

Revenue also saw impressive growth, rising 26.8% to $23.6 billion, marking eight consecutive quarters of revenue growth above 25%. Both subscription solutions and merchant solutions drove this top-line growth, with increases of 21.3% and 28.9%, respectively. New customer additions and increased pricing and variable platform fees supported the subscription segment, while expanded GMV and GPV, alongside geographical expansion and greater use of payment solutions, boosted the merchant segment.

However, Shopify experienced a 100 basis point decline in its gross profit margin to 49.5%, primarily due to increased cloud and infrastructure hosting costs and a reduction in non-cash revenues from certain high-margin partnerships. Despite this, the company’s efforts to develop lean, efficient teams and leverage operating efficiencies helped reduce operating expenses as a percentage of total revenue, from 47% to 41%.

With strong top-line growth and lower operating expenses, Shopify posted an operating income of $203 million, representing 9% of total revenue—up from 5% in the previous year’s quarter. Additionally, the company generated $363 million in free cash flows, with its free cash flow margin improving 300 basis points to 15%.

Shopify's Growth Prospects

Shopify is focusing on supporting small- and medium-sized businesses in adapting and expanding their operations, especially amid ongoing trade challenges. The company has introduced several features, such as product filtering by country, duty calculation, and shipping management, which help businesses engage in cross-border trade.

The company continues to expand its payments platform, reaching 39 countries by the end of the first quarter. It has launched multicurrency payouts in 20 European countries, allowing merchants to accept payments in multiple currencies. The platform aims to streamline onboarding, enhance security, reduce fees, improve conversion rates, and boost the buyer experience.

Moreover, Shopify is leveraging artificial intelligence (AI) to improve operational efficiency and develop innovative products. The acquisition of Vantage Discovery could accelerate the development of AI-powered search features. These initiatives suggest that Shopify's growth prospects remain robust.

Investor Considerations

Despite strong recent performance, Shopify's valuation appears high, with next-12-month price-to-sales and price-to-earnings multiples of 13.3 and 80, respectively. However, for investors with a three-year horizon, the stock could offer superior returns.

Investors should carefully evaluate their options before making any decisions. While Shopify has shown consistent growth and innovation, other stocks may present more attractive opportunities depending on individual investment goals and risk tolerance.