Investors had high expectations heading into this year Shopify's (NYSE:Shop) Fourth quarter earnings update. they didn't disappoint. In mid-February, the e-commerce infrastructure specialist said it would return to profitability in the second half of 2023 as sales growth accelerated and cash flow soared, after suffering severe losses through most of the past two years. I reported it.
There's more good news when it comes to Shopify's bright outlook for the year ahead. Let's take a look at that prediction and why this stock is a great buy for growth investors.
A powerful ending
Shopify ended the year on a very good note. Transactions across the company's platforms accelerated for the fourth straight quarter, improving to 30% after adjusting for the sale of its logistics business.
This was enough to make this business stand out against most rivals in both the e-commerce and traditional retail industries. This growth can lead to solid market share expansion compared to companies such as: eBay and Etsy, reported that volumes were flat or declining for the year. “2023 was a great year for both Shopify and our merchants,” President Harley Finkelstein said in a press release.
Seller wins
Strong engagement among merchants has improved the business in several key ways, in addition to overall sales growth. Shopify posted significant gains in its subscription and recurring revenue segments due to higher prices and increased demand for its services. Recent additions to this portfolio include new payment processing tools and an artificial intelligence (AI) suite called Shopify Magic. “We remain focused on driving innovation in the evolving commerce environment,” Finkelstein said.
It's not yet clear how much impact AI will have on Shopify's business. However, management is busy incorporating technology into most of its portfolio. The real test is whether AI increases the value of the platform for merchants. The best way to determine success here is to track subscription revenue and pricing trends over time.
Predictions for 2024
Finkelstein and his team expect this positive momentum to continue into 2024. Adjusting for the sale of the logistics division, they predict that first-quarter sales are likely to increase by nearly 30%. Most Wall Street professionals expect reported sales to rise more than 20% in 2024, after increasing 26% last year.
The big question going forward is whether Shopify can build a sustainable profitable business out of this growth success. Although operating income was in the black last quarter, the company reported a wider deficit for the full year. This doesn't bode well for a company trading at a high premium of more than 14 times sales.
But a more useful metric to look at here is free cash flow, which surged to over 20% of sales in the last quarter. Management aims to continue to ensure this number remains in positive territory. Additionally, our software-as-a-service sales approach makes cash flow a strong indicator of long-term profitability.
We expect profits to expand rapidly in 2024 due to solid growth and improving profit margins. A win there could help this rising stock continue to deliver superior returns to shareholders over the long term.
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Demitri Kalogeropoulos has a position at Shopify. The Motley Fool has a position in and recommends Etsy and Shopify. The Motley Fool recommends Her eBay and recommends the following options: Her April 2024 Short Her Call of $45 on eBay. The Motley Fool has a disclosure policy.
This great growth stock is poised for big sales increases in 2024 Originally published by The Motley Fool
