Why Shopify stock is rising

Written by Karen Thomas, M.A., CFA at The Motley Fool Canada

Volatile stock movements e.g Shopify (TSX:SHOP) are often difficult to understand. This is because they rely as much on investor sentiment and psychology as they do on fundamentals. Shopify shares rose about 4% in Friday trading. This followed a sharp increase from May lows (+19%).

What’s happening with Shopify stock?

Shopify stocks are falling

During the pandemic, Shopify’s stock price rose to new and seemingly unsustainable highs, reaching $214 per share in November 2021. This was a function of the strength of the e-commerce industry, which was boosted significantly by stay-at-home orders. This was also driven by investor excitement and optimism about everything related to e-commerce.

But 2022 ushered in a new reality and a new perception. The pandemic was coming to an end, consumers were visiting shopping malls again, and life was returning to “normal”. What will happen to Shopify? Investors began to get nervous, and their optimism quickly gave way to tension and nervousness. This sentiment couldn’t generate the high valuations that Shopify stock was accustomed to, and the stock took a hit.

Shopify continues to impress

In Shopify’s latest quarter, Q1 (Q1) 2024, the company once again reported exceptionally strong results, demonstrating the continued trend of the e-commerce business. Revenue for the quarter increased 23% to $1.9 billion, led by improved margins. For example, Shopify’s gross margin increased to 51.4% and its free cash flow margin increased to 12%.

However, the company reported a surprise loss of $0.21 per share and said the sale of its logistics business would have a negative impact on second-quarter revenue growth. This means that we should expect an increase in revenues in the older age group. This caused Shopify’s stock to drop 18% that day.

Currently, various analysts are highlighting the value of Shopify stock after this dramatic decline. For example, JP Morgan analysts started coverage on Shopify overweight. Additionally, Evercore upgraded Shopify to outperform, with a price target of $75.

The story continues

Looking to the future

Gone are the days of negative free cash flow and cash burn issues. Today, Shopify is significantly increasing its profitability and generating increasing cash flow. In the first quarter, operating cash flow was $238 million, 138% higher than last year.

Analyst earnings estimates are also rising. Analysts estimate that Shopify will earn $0.98 per share in 2024, up 34% from the previous year. Earnings are expected to grow 29% in 2025 and 36% in 2026.

Beyond the numbers, the company continued to expand into new geographic markets and introduce new ways to improve and facilitate the business owner experience. For example, Shopify introduced Sidekick, an AI-enabled e-commerce assistant. Sidekick encapsulates all of Shopify’s analytics and data with a machine learning algorithm that merchants can use. Sidekick will analyze the data and use it to make decisions such as promotions, store design, content and analytics.

The most important thing

To summarize, Shopify’s stock price is rising as analysts bid up the stock and investors buy the dip. The business remains strong, but the stock valuation remains high. So the strategy of buying the dips seems very reasonable to me.

The post Why Shopify Stock Is Rising Higher appeared first on The Motley Fool Canada.

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

2024