Shopify's stock seems to be taking off

The fourth-quarter report is due on Feb. 11

Shopify Inc., the second largest e-commerce platform in North America, reports its fourth-quarter results on Feb. 11. Going by previous quarters, we could see some sharp fluctuations in the price of Shopify shares on that release day.

There could also be more signs that its stock price is in secular uptrend similar to the 2015 to 2021 timeframe, although it may not be as dramatic as that period’s 5,000% gain in price nor as impressive as beating analysts’ expectations 24 quarters in a row.

That amazing run came to an end in late 2021 and the first half of 2022, when COVID-19 abated and online shopping dropped back to its long-term growth trend. Plus, pent-up demand and supply bottlenecks triggered an inflation problem that compelled central banks to hike interest rates.

Shopify’s stock had a long ways to fall, having acquired a stratospheric valuation when online shopping took off during the pandemic. Its price fell by 75%, until finally reaching bottom mid-2022.

Since the bottom, there has been an uptrend in Shopify’s earnings over the last nine quarters. They have gone from US$-0.02 per share in the second quarter of 2022 to US$0.36 per share in the third quarter of 2024 (data from Zack’s Investment Research).

Five of the quarterly reports triggered an average spike of 21% in stock price on release day, when Shopify beat analysts’ projections and issued positive outlooks. For the other quarters, Shopify again beat analysts’ projections but experienced price declines averaging 12% when weaker guidance was issued for the ensuing quarter.

With these kinds of market reactions, it's tempting for investors to try and anticipate Shopify’s quarterly results.

One possible way is to monitor analysts’ revisions to their earnings and revenue forecasts in the run up to the report. Academic research has found that when analysts revise their estimates upward, they likely have received new information that is positive for the company and the stock when the report is published.

Zack’s Investment Research currently gives the consensus estimate for Shopify’s fourth-quarter earnings at US$0.44 per share, based on the estimates of some three-dozen analysts covering company. It might be difficult to track the revisions of so many analysts but there are summary reports online at sources such as seekingalpha.com.

There could be other ways, too. Of note, Shopify’s executives post frequently on social media and give frequent talks on podcasts. Sometimes there may be small tells in what they say. For example, it seemed to be a good omen when on Christmas day, CEO Tobi Lütke posted on X: “Merry Christmas. 2025 will be epic [my italics].”

One concern about the earnings report due Feb. 11, is that there was a price increase in Shopify’s stock of more than 40% in the fourth quarter. The company’s valuation is rather elevated and could be susceptible to sizeable correction on news that disappoints.

Nonetheless, if there is a sell-off, it will more than likely be a temporary setback, and a buying opportunity. Shopify’s stock sold off on four of the past nine quarterly reports yet for the whole nine-quarter period, its stock climbed over 250%.

Shopify is also riding an expanding market for e-commerce services. As brick-and-mortar commerce continues shifting to online channels, Shopify’s total addressable market (TAM) should keep rising. E-commerce transactions in North America constitute just over 15% of retail sales, whereas China’s e-commerce penetration rate of more than 30% suggests the North American market has a lot more room to grow.

A JP Morgan analyst estimated in June of 2024 that Shopify's “global serviceable e-commerce opportunity” (excluding China, Amazon, Apple, and Walmart) was $60 billion, suggesting that its level of sales at that time had captured less than 11% of Shopify’ serviceable market.

Meanwhile, Shopify continues to gain market share in a fast-growing sector, thanks to having the financial resources to spend substantially more than rivals on R&D and new tools such as AI. The result is a lineup of e-commerce services on the cutting edge, as well as an ongoing streamlining of operations to improve such things as profit margins.

Shopify’s bullish phase from 2015 to 2021 was fueled mostly by torrid revenue growth, not so much by growth in earnings and cash flow. Yet, the revenue growth produced a huge and prolonged escalation in the share price, and this ongoing strength enabled Shopify to issue several rounds of shares from treasury to rake in more than US$7 billion by the end of 2021.

A flywheel between growth and financing – i.e. a self-reinforcing feedback loop in growth and financing – had thus sprung up to power Shopify’s trajectory. The more Shopify grew, the more financing it could raise; the more financing it raised, the more it could grow. The flywheel was halted by the collapse in its stock during 2022 but now is poised to rise again as company growth continues to surprise on the upside.

If this trend persists, as company initiatives and new product lines suggests will likely be the case (details to come in a future post), Shopify could find that new shares are easily absorbed by the market, and the flywheel could start spinning again.

This time around, though, Shopify will also have a capacity for self-financing because earnings and cash flow have risen to strongly positive levels. Operating income for the past 12 months averaged more than US$160-million per quarter; free cash flow has averaged US$400-million per quarter.

In short, Shopify seems to be getting back on track after the upheaval of that colossal Black Swan event, the COVID-19 pandemic. Its stock is still yet to break above the all-time high of $215 (spilt-adjusted) on the TSX in November of 2021 but it is getting closer.

Larry MacDonald is a contributor to The Globe and Mail and author of a new book, The Shopify Story: How a Startup Rocketed to E-commerce Giant.

(Photo credit: Negative Space: https://negativespace.co/space-rocket-smoke)