Is Shopify Stock Finally a Buy?

Shopify (NYSE: SHOP) stock has popped 26% since releasing its phenomenal second-quarter earnings results on Aug. 7, but it's still down over 50% in the past three years. There's been a lot going on at Shopify that's keeping investors on their toes. Let's see where the business is today and whether or not it's a good time to buy shares.

Growth has been better than expected

Let's take a step back and give the recent earnings report some context. Shopify, which offers white-label e-commerce services to business clients, has been a leader in website creation and e-commerce solutions for many years. It provides complete packages for any small business to get online and start selling quickly with design, payments, data analysis, and more. As the leader in this niche, its stock was already growing steadily before the pandemic, but as revenue surged with the onset of COVD-19, Shopify stock skyrocketed too.

The pandemic-fueled growth didn't last, but the company is still growing at a robust rate, and it came in ahead of guidance in the second quarter. Revenue increased 21% year over year. Gross merchandise volume (GMV), which is the volume of sales it processes through its client stores, increased 22%. That's a strong showing in a macroeconomic environment hampered by inflation and fears of a recession.

Shopify has done a great job expanding its offerings with single solutions for enterprise clients, physical payment services, business-to-business services, and cross-border transactions. These non-core services are driving growth. For example, offline sales increased 27% year over year in the second quarter, and business-to-business GMV increased 140%.

Most of Shopify's revenue comes from payment processing, and as more clients join the platform, the percentage of GMV it processes has risen, including a 350 basis point increase to 61% in the second quarter.

It's still working toward sustained profitability

One thing Shopify doesn't offer clients is logistics, but that's not for lack of trying. It acquired a logistics operation called Deliverr in 2022 to support its efforts to build out a complete, end-to-end service for clients and to become a real competitor to Amazon . However, it was too much too fast, and management announced in May 2023 its plans to sell off its logistics arm and focus on core services. It also cut jobs to get the business more in line with demand and become more cost efficient.

These moves are paying off. Operating income was $241 million in the second quarter with an 11.8% margin, and net income was $171 million. Free cash flow increased from $97 million a year ago to $333 million.

Although these numbers were strong, Shopify doesn't have a proven track record of being profitable, and the benefits of its exit from the logistics business are still materializing.

This chart gives some visual representation of what's been going on.

Data by YCharts .

Revenue continues to rise at a steady clip, but operating and net income have been less consistent. Those figures are strengthening, and as Shopify continues to scale without logistics dragging down profitability, that's a trend that's likely to continue.

Shopify stock is still expensive

Shopify stock trades at a price-to-sales ratio near 12, which is close to its average over the past two years. Its forward P/E ratio is 52.

Investors with a long time horizon and a stomach for risk might be interested in buying Shopify stock. It's expensive, but stocks often command a premium when the market values their underlying growth and opportunities. With the company moving in the right direction, this growth stock can still climb higher long term. However, expect volatility along the way.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy .