Shopify (TSX: SHOP) (NYSE: SHOP) has been one of the best tech stocks based on the returns it has generated since listing on the Toronto Stock Exchange in 2015. The stock has increased by over 4,800% in the past five years. The company’s unique business model, strong demand for its e-commerce solutions, and constant innovation have been some of the key factors in its immense success in such a short period of time.
Although he has generated extraordinarily high returns over the past few years, I still find his stock to be worth investing in at this time. Let’s discuss why I expect its stock to rise further over the next few months.
The strong fundamentals of Shopify
Shopify stocks surprisingly didn’t experience much appreciation earlier this year. At the end of May 2021, it was trading with only 3% gains for the year, significantly underperforming the broader market. During the same period, the TSX Composite Index had risen by more than 13%.
Towards the end of 2020, Bears began to claim that Shopify could face a significant drop in its sales growth rate from the first quarter of 2021. Their arguments fell flat when the company reported incredible growth in sales. sales in the first quarter. The Canadian tech giant reported first quarter revenue of US $ 989 million. It reflects a 110% year-over-year (year-over-year) increase in revenue. A massive 137% year-over-year jump in merchant solutions sales as well as a steady increase in subscription solution sales boosted total revenue.
The surge in demand from the pandemic not only boosted Shopify’s sales, but also drastically increased its profit margins. In the first quarter, the company reported adjusted net income of US $ 254 million with a strong margin of 25.7%. This margin was significantly better than its adjusted net profit margin of just 4.8% a year ago and 20.3% in the previous quarter.
Shopify management plans to use the recent massive business growth to further develop the business of the company. While management expects its rapid gross margin growth to continue in 2021, it has guided the company’s adjusted operating profit for 2021 to a level below 2020 levels. To me, it seems. Obvious, because as the surge in demand caused by the Shopify pandemic begins to fade, its overall profitability could drop a bit. Nonetheless, SHOP should still maintain much higher profit margins over the next few quarters than most of its peers, in my opinion.
Why the stock could soar in July
As I explained in some of my recent posts, I expect most of her subscribed customers will continue to use Shopify’s ecommerce services, even in the post-pandemic world. This could continue to drive strong growth in the company’s subscription solutions, resulting in better-than-expected revenue growth.
Interestingly, the Shopify stock outperformed the overall market in June after trading on a mixed note in the first five months of the year. As of June 29, the stock was trading with cumulative gains of 24.2% compared to a 2.2% gain in the TSX Composite Benchmark. This might just be the start of another mid- to long-term rally in Shopify stocks. Rising investor expectations for the company’s future results could help its stock skyrocket in the coming months.
The publication Why Shopify (TSX: SHOP) Stock Could Soar in July 2021 first appeared on The Motley Fool Canada.
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The Motley Fool owns shares and recommends Shopify. The Motley Fool recommends the following options: $ 1,140 long calls in January 2023 on Shopify and $ 1,160 short calls in January 2023 on Shopify. Foolish contributor Jitendra Parashar has no position in any of the stocks mentioned.