It isn't uncommon for stock owners to see some fantastic returns throughout their investing careers. That's especially true if you're targeting long holding periods that are measured in decades rather than quarters. Toss in strong annual sales and earnings growth, and you've got the essential ingredients you need to build a retirement portfolio that reaches into the seven figures.
Diversification is a key pillar in this process, but you could use some standout winners that deliver an outsize portion of your total positive returns. Could Shopify (NYSE: SHOP) play that role in your portfolio? Let's look at the e-commerce platform stock's long-term potential.
Fear of missing out
The main worry for prospective investors is that Shopify's biggest growth days are already behind it. Shares more than doubled in 2023, after all, with returns easily surpassing the 41% rally in the tech-heavy Nasdaq Composite Index.
Focus on the business performance, though, and you'll see plenty of room for growth ahead. Shopify in early November reported a 25% sales increase in Q3 that was powered by surging transaction volumes. Yet, rising demand from merchants was even better news for the business. Shopify posted 24% higher sales in its merchant solutions platform and a 32% spike in recurring revenue.
These trends suggest a much higher sales footprint for this business in several years. Most Wall Street pros are predicting Shopify will grow by about 20% this fiscal year after an expected 25% increase for 2023.
The lower cost profile
Strong growth isn't particularly valuable if you can't profit from the rising sales. Shopify doesn't seem to have an issue here. Gross profit margin improved to 53% of sales last quarter from 49% of sales a year earlier. Shopify also broke into positive territory on bottom line profits. Operating income was $122 million last quarter, or 7% of revenue, compared with a loss of $346 million -- or 25% of revenue -- a year ago.
These gains came from the combination of higher sales and a much lower cost burden thanks to the sale of Shopify's expensive logistics arm in 2023. That move immediately boosted profit margin but probably isn't done lifting the business.
But because it's a software-as-a-service business, it's useful to follow Shopify's cash flow trends, too. Free cash flow improved to 16% of sales this past quarter, and continued success pushing that metric higher could power great returns for shareholders in 2024 and beyond.
Does Shopify have room to rise?
Much of this positive news is already factored into Shopify's elevated stock premium. Shares are trading for 14 times annual sales, making it more expensive than much more profitable software businesses, including Microsoft and Adobe. Shopify hasn't demonstrated that it can generate sustainable profits as these companies have, either. It also has a lower sales footprint that exposes it to weaker results during economic downturns.
Still, the long-term outlook is bright for this business as it builds upon its roughly 10% market share in the U.S. e-commerce industry. That progress won't be enough to make this a millionaire-maker stock anytime soon, though. Shopify also needs to make its platform more valuable to merchants through artificial intelligence (AI) tech, for example, and by adding more services over time. Wins here would extend its positive 2023 stock momentum into 2024 and beyond.
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Demitri Kalogeropoulos has positions in Shopify. The Motley Fool has positions in and recommends Adobe, Microsoft, and Shopify. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.