Shopify (SHOP): Buy, Sell, or Hold Post Q2 Earnings?

Shopify has been on fire lately. In the past six months alone, the company’s stock price has rocketed 94.3%, reaching $164.40 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Following the strength, is SHOP a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free for active Edge members.

Why Is Shopify a Good Business?

Starting with just three people selling snowboards online in 2004, Shopify (NYSE:SHOP) provides a comprehensive platform that enables merchants of all sizes to create, manage and grow their businesses across multiple sales channels.

1. Billings Surge, Boosting Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Shopify’s billings punched in at $2.67 billion in Q2, and over the last four quarters, its year-on-year growth averaged 29.5%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Projected Revenue Growth Is Remarkable

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.

Over the next 12 months, sell-side analysts expect Shopify’s revenue to rise by 23.9%. While this projection is slightly below its 26% annualized growth rate for the past two years, it is eye-popping for a company of its scale and implies the market sees success for its products and services.

3. Customer Acquisition Costs Are Recovered in Record Time

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Shopify is extremely efficient at acquiring new customers, and its CAC payback period checked in at 6 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation due to its scale. These dynamics give Shopify more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

Final Judgment

These are just a few reasons why we think Shopify is an elite software company, and after the recent surge, the stock trades at 17.3× forward price-to-sales (or $164.40 per share). Is now a good time to buy despite the apparent froth? See for yourself in our in-depth research report, it’s free for active Edge members.

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