CA - Shopify: 3 Reasons To Buy In 2024

2024-01-03 00:51:51 ET

Summary

• Shopify has seen a strong recovery and its stock has doubled in the last year.
• Three catalysts for Shopify in 2024 are increased profitability, untapped growth potential, and favorable macroeconomic conditions.
• Despite the potential risk of a recession, Shopify is expected to continue its growth trajectory in 2024.

Thesis Summary

Shopify Inc. ( SHOP ) has seen a strong recovery in the last few months.

Those who say that only the magnificent seven have rallied this year have clearly not been following Shopify.

The stock has doubled in the last year while posting strong results in the last quarter.

I can think of at least three catalysts that will propel Shopify in 2024.

• Increased Profitability

• Untapped growth

• Favourable macroeconomic conditions

2023 In Review

Though a lot of the attention this past year has gone towards the magnificent seven, there are a few stocks out there that have managed to keep up with these names, and Shopify is one of them:

Shopify’s stock has rallied over 120% in 2023, and I believe there could be a lot more ahead for this company.

In my last article on Shopify , I rated the stock a hold. Back then, growth was lacklustre, while profitability was nowhere to be seen.

However, I believe a lot has changed since then, almost a year later. For this reason, I am upgrading SHOP to a Buy.

Operationally, Shopify has had a great year, continuing to dominate the market while also increasing its profitability.

Revenue continues to grow at a healthy clip, with new products now beginning to add more revenue.

Most significantly, though, the company has begun to turn around its profitability.

In the last quarter, SHOP managed to increase its gross margin to 52% thanks to an increased cost discipline.

For the whole year, the company expects to see growth in the mid-twenties range.

Overall, I have seen some encouraging trends on display over the last year, and although Shopify’s stock isn’t cheap, I can clearly see why, and I do think 2024 could see the stock continue rising.

3 Catalysts in 2024

Moving forward, I think there’s room for Shopify to increase its profitability further and keep growing at double digits.

Profitability

Profitability has been shown as a top priority.

We laid out a very deliberate vision in the last couple of quarters to balance both operational ambition and financial discipline, and the results speak for themselves, delivering top-line growth and profitability, and you’re seeing more and more of the biggest brands on the planet; join Shopify.

Source: Q3 Earnings Call

The first step towards this was offloading their logistics arm , which they sold to Flexport back in May.

This allows Shopify to focus on what it does best, which is to provide great value to companies and entrepreneurs.

In the last quarter, the company also reduced its headcount and stock-based compensation. and we’re seeing this reflected where it matters:

FCF turned positive in the last quarter, bucking a long trend of negative operating income in the previous six quarters.

In fact, the company set a record for operating income in the last quarter, which is very encouraging to see.

Moving forward, I expect the company will be able to maintain this as it focuses on staying lean and reducing its expenses.

Untapped Growth

Despite having been a reasonably mature company, Shopify continues to have a huge untapped potential, with plenty of market share left to capture.

The share of eCommerce sales as a percentage of retail sales has been steadily rising year after year, but even in North America, the penetration rate is 15%.

Plus, Shopify can do much more than eCommerce and is, in fact, already growing “offline” revenues.

In this sense, Shopify has barely captured 2% of North American retail sales and 0.5% of global sales. Even looking just at eCommerce sales, there are still trillions out there.

Macro Outlook

Lastly, I believe the macro outlook will certainly support higher prices in Shopify’s stock. Shopify is a high-growth stock, which will be favoured by the Fed’s cutting cycle. We can see that this already happened back in 2019.

As yields come down, investors become more comfortable with riskier bets and rotate into these assets in order to find higher returns. Shopify is one such stock that I feel will greatly benefit from this change in the macro regime.

Risks

Of course, with the market and Fed signalling rate cuts, and the Yield curve still inverted, there’s a chance that the US economy could actually enter a recession in 2024.

As most investors know by now, recessions typically coincide with the uninverting of the yield curve. This has happened in the last four recessions.

As things stand right now, we could definitely see the yield curve begin to uninvert, perhaps in the second half of the year.

Given the nature of Shopify’s business, its revenues would be quite quickly affected by a downturn in the business cycle.

Takeaway

All in all, I still think Shopify could have a good runway in 2024. The company is at a pivotal point where it is once again generating cash, and I expect investors might reward that.

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