Following Shopify's noteworthy quarterly performance, is there a chance Shopify's stock could reclaim its historical peak?
Following Shopify's noteworthy quarterly performance, is there a chance Shopify's stock could reclaim its historical peak?
There's been a buzz around e-commerce giant Shopify (SHOP negating 0.59%) recently. It unveiled robust earnings figures for the third quarter, leading to a surge in its stock price. The company has scaled new heights, hitting a fresh 52-week high, and there might be further growth potential for Shopify in the ongoing quarter.
Given its impressive figures, can the stock reclaim its record-breaking high from 2021?
Shopify's growth momentum is picking up pace
Due to a series of economic factors like supply chain constraints, inflation, and post-pandemic spending decline, Shopify's growth rate exhibited volatility in the past few years. With economic uncertainty looming, investors feared that Shopify may encounter additional hurdles in the near future.
However, Shopify's growth rate picked up pace in the recent quarter, reversing the downward trend. The commendable results caught investors off guard, causing the e-commerce stock to skyrocket by 21% post earnings announcement.
The company recorded $2.2 billion in revenue for the quarter ending September 30, marking a 26% year-over-year growth. Excluding its logistics division, which was sold last year, Shopify reported consecutive quarters of more than 25% revenue growth. And looking ahead to the final quarter of the year, Shopify expects its revenue growth rate to remain in the mid- to high 20% range.
Is Shopify's stock overpriced?
Shopify's stock hasn't touched these heights since early 2022, when it started to decline in response to a deteriorating economic outlook. Its all-time high closing price was $169.06, achieved months earlier. For Shopify to reclaim those levels, it would need a rise of approximately 60%.
While the stock appears expensive given its current valuation, trading at nearly 100 times its trailing earnings and 75 times next year's profits, its operations have become more efficient by focusing on the bottom line rather than just top-line growth. However, its profits are still relatively low to justify a significant increase in its share price in the current market scenario.
In 2021, when Shopify's stock reached its peak, investors mainly focused on its growth potential, often neglecting valuations and earnings multiples, which led to many stocks reaching unprecedented prices. While Shopify is a commended growth stock, it may have been overvalued at those levels during the initial period.
Despite a modest price-to-earnings-to-growth ratio (PEG ratio) of 1.1, Shopify could be a viable long-term investment at its current price for investors with a long-term perspective. However, absent a return of meme-stock mania, it's unlikely that Shopify will reclaim its all-time high in the short term.
Shopify has ample growth potential, but investors should manage their expectations
Shopify may not increase by 60% in the near future to reach its all-time high, but it can still be an excellent long-term investment for your portfolio. The company has a global reach, serving clients in 175+ countries, helping them expand their businesses. It still has a lot of growth potential and can serve as a buy-and-hold stock for the long term. However, investors must be cautious about setting unrealistic expectations given the current economic conditions.
Given Shopify's impressive 26% revenue growth in the third quarter and expectations of mid- to high 20% revenue growth in the fourth quarter, investing in its stock might be an attractive proposition for some. Nevertheless, its high valuation relative to earnings and profits should not be overlooked.
In light of the economic uncertainty and the stock's current valuation, it's crucial for finance-savvy investors to carefully assess the potential risks and rewards before deciding to invest money in Shopify's shares.