Shopify (BUSINESS – Zacks (Free Report) shares have returned 21.5% over the past month, outperforming both the Zacks Computer & Technology sector and the Zacks Internet Services industry. During the same period, the sector and industry have lost 1.2% and 6.4%, respectively.
The outperformance is due to Shopify’s robust results in the second quarter of 2024, which benefited primarily from a growing merchant and partner base.
Total revenue increased 20.7% year-over-year to $2.05 billion, beating the Zacks Consensus Estimate by 2.03%. Adjusted for the sale of the logistics business, revenue increased 25% year-over-year.
Second-quarter 2024 adjusted earnings of 26 cents per share comfortably beat the Zacks consensus estimate by 30% and rose 85.7% year-over-year.
SHOP shares benefit from robust forecast for the third quarter
Shopify provided solid guidance for the third quarter of 2024. The company expects revenue growth in the low to mid-twenties year-over-year, with gross margin expected to increase 50 basis points sequentially.
One-month performance
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The Zacks Consensus Estimate for third-quarter 2024 revenue is $2.10 billion, representing year-over-year growth of 22.69%. The consensus for earnings is 27 cents per share, up 17.4% over the past 30 days and suggesting growth of 12.5% from the figure reported in the year-ago quarter.
Strong dealer base improves the long-term prospects of SHOP shares
Given its growing merchant base and growing partner base, Shopify’s long-term prospects are good.
Shopify’s latest updated releases included more than 150 new product updates and features. SHOP has surpassed $1 trillion in cumulative gross merchandise volume (GMV), while its offline business surpassed $100 billion.
In Q2 2024, offline GMV increased 27% year-on-year with new multinational brands such as EVEREVE and MAJOURI. These brands are launched online and offline with Shopify, which totals more than 130 locations across four regions.
Merchant-friendly tools like Shop Pay, Shopify Collective, Shopify Audiences, Shopify Capital, and Shop Cash offerings help the company consistently attract new merchants in a tough economic environment. Shopify’s platform is widely used by small and medium-sized businesses that suffer 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 increased to $41.1 billion and accounted for 61% of GMV processed.
Shopify reported its highest B2B GMV month ever, up 140% year-over-year, driven by Plus merchant growth in Q2.
With the integration of Shop Pay installments into the POS terminal and the general availability of Pro, merchants can more easily find and engage their customers.
Shopify plans to improve the operational efficiency of its point-of-sale offering by introducing new 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.
Expansion of the partner base: An important catalyst for the SHOP share
A growing partner base that includes TikTok, Snap, Pinterest, Criteo, IBM, Cognizant, alphabet (GOOGLE – Free report), Amazon (Amazon – Free report), Goal (TGT – Free Report), Manhattan Associates, COACH and Adyen are expected to continue to expand their merchant base.
Alphabet division YouTube recently expanded its partnership with Shopify to attract more brands to its YouTube Shopping Partner Program.
Shopify’s strategy to focus on its core business by divesting its logistics business was a notable development. The partnership with Amazon allows Shopify merchants to leverage the company’s vast fulfillment network. The relationship with Target also strengthens SHOP’s presence.
Notably, Shopify’s growing international presence is evident. In the second quarter, the company launched point-of-sale terminals in eight additional countries, contributing to an impressive 2.4x increase in GMV.
Shopify stock is overvalued
The Value Score of D suggests that Shopify’s valuation is currently stretched, making the company a risky bet for risk-averse investors.
SHOP stock is trading at a premium with a forward price-to-sales ratio of 10.10 for the next 12 months compared to Zacks’s 5.44 times for the Internet Services industry.
Price-to-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, suggesting robust upside momentum.
SHOP shares are trading above the 50-day SMA
Image source: Zacks Investment Research
Diploma
Shopify is benefiting from the strong growth of its merchant base. The expansion of back-office merchant solutions to additional countries strengthens SHOP’s international presence. Although the current valuation is overstretched, the long-term growth prospects are hard to ignore.
However, difficult macroeconomic conditions and persistent inflation are cause for concern.
Shopify currently has a Zacks Rank #3 (Hold), suggesting it may be wise to wait for a cheaper entry point into the stock. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
