Shopify (NYSE: SHOP) has been a fabulous growth stock to own recently. Today, it has risen a whopping 25% on the back of its Q3 earnings.
Is it too late to buy after this monumental gain? Let’s discuss.
This stock is volatile
I bought this stock for my own portfolio back in early 2021. And since then, it has been a wild ride.
By late 2021, I was up about 50%. However, the stock then tanked in 2022, leaving me sitting on a loss of about 75%.
I was pretty confident in the long-term story associated with the growth of the online shopping market, however. So, I bought a few more shares at lower prices.
Averaging down like this has paid off. Today, I’m sitting on a gain of around 45%, which is not a bad return in less than four years.
I’m still bullish
Looking ahead, I remain bullish on the long-term story here.
The e-commerce industry continues to grow at a rapid rate and Shopify – which offers a comprehensive platform for brands – is picking up new customers all the time.
Businesses using the platform today include the likes of Tesla, Red Bull, and Heinz. The fact that these types of companies are using Shopify suggests that it has a great platform.
As for the financials, they’re excellent. For the third quarter of 2024, revenue was up 26% year on year to $2.2bn while operating income was up 132% to $283m.
On the back of this performance, the company raised its full-year revenue guidance to “mid-to-high-twenties” percentage growth. Analysts had been expecting growth of 22.7% which is why the share price has surged today.
Q3 was outstanding, further establishing Shopify as a leader in powering commerce anywhere, anytime. Our unified commerce platform is becoming the go-to choice for merchants of all sizes.
Shopify President Harley Finkelstein
One thing that’s helping the company today is artificial intelligence (AI). Earlier this year, the company launched its AI assistant, Sidekick, which provides sellers with sales reports and data on customers and can help with tasks like setting up discount codes.
High valuation
Turning to the valuation, the stock is expensive today.
Currently, analysts expect Shopify to generate earnings per share of $1.37 for 2025. So, we are looking at a forward-looking price-to-earnings (P/E) ratio of about 80.
That doesn’t leave any room for error. If we were to see a consumer slowdown, or competitors such as Amazon stealing market share, the stock could take a tumble.
But I wouldn’t necessarily rule the stock out because of this valuation. This is a stock that has always been expensive. And the high valuation hasn’t stopped it generating strong returns over the long term. Over the last five years, it has risen about 260%.
How I’d play Shopify
What I’d probably do if I didn’t own the stock but was interested in buying it is start a small position now and then look to add to it over time. This is what I generally do with these kinds of expensive growth stocks.
With a small position, I can profit if the stock continues to soar. However, if the stock experiences a pullback, I’m not badly impacted (and I can buy more to lower my average buy price).
