While the Canadian equity markets have experienced volatility due to Donald Trump’s protectionist policies, they have performed well overall, with the S&P/TSX Composite Index increasing by 18.3% over the past 12 months. Shopify (TSX:SHOP) has outperformed the broader market, with a remarkable 56% rise in stock price during the same period. This strong performance can be attributed to solid quarterly results and healthy growth prospects. Let’s review Shopify’s recently reported fourth-quarter earnings and future growth potential to determine if it’s still a good stock to buy.
Shopify’s Fourth-Quarter Earnings
In the fourth quarter, Shopify achieved a Gross Merchandise Value (GMV) of $94.46 billion, reflecting a 26% year-over-year growth. This increase was driven by strong same-store sales growth from existing merchants, new customer acquisitions, new product launches, and geographical expansions. Shopify’s international segment experienced impressive GMV growth of 33%, with notable performances in Europe, the Middle East, and Africa.
As a result of GMV growth, the company saw a 31% year-over-year increase in revenue, totaling $2.81 billion. This marked the seventh consecutive quarter of more than 25% top-line growth. Gross profits grew by 27%, but gross margins declined slightly by 150 basis points to 48.1%, primarily due to higher cloud infrastructure spending and lower noncash revenues from certain partnerships.
Shopify also improved its operating efficiency. Operating expenses fell from 36% of revenue last year to 32%, reflecting better operating leverage and a lower headcount. This, combined with strong top-line growth, led to a 60.9% increase in operating profits, totaling $465 million. Operating margin improved from 13.5% to 16.5%. Furthermore, the company generated healthy free cash flows of $611 million, representing 22% of its total revenue. Shopify’s free cash flow margins showed consistent improvement throughout 2024.
Growth Prospects
Shopify benefits from the growing trend of omnichannel selling, which presents significant multi-year growth potential. The company continues to invest in research and development (R&D) to capture increasing demand by enhancing its platform and expanding product offerings. This year, Shopify plans to focus on core platform development, international expansion, business-to-business (B2B) growth, enterprise solutions, and offline initiatives.
Management expects the merchant solutions segment to outperform the subscription solutions segment in revenue growth, driven by expanding payment solutions, increased product adoption, and new offerings. However, the company anticipates that its shift to three-month trials and the absence of price hikes this year may negatively impact revenue from its subscription solutions.
For the first quarter of fiscal 2025, Shopify’s management projects top-line growth in the mid-20s, with gross margins increasing in the low 20s. Additionally, free cash flow margins are expected to improve from 12% in Q1 2024 to the mid-teens. These factors point to strong growth prospects moving forward.
Investor Takeaway
Shopify has delivered an impressive 191.2% return over the last two years, with an annualized rate of 70.6%. However, the steep increase in stock price has led to higher valuations, with its next-12-month price-to-sales and price-to-earnings ratios at 13.1 and 74.0, respectively. Despite its elevated valuation, I remain bullish on Shopify due to its favorable market conditions, growth initiatives, and improved profitability.
Sign Up For our Newsletters to get latest updates
