Software companies are experiencing a sell-off this year. Shopify (NASDAQ: SHOP), a corporation that runs a cloud-based platform that allows online merchants to start and run e-commerce stores, hasn’t escaped the bloodbath. The company’s shares are down by 34% to date. However, at current levels, it might be a great idea to invest in Shopify, as the stock has what it takes to rebound and perform well over the long run. Here’s why the e-commerce specialist might be a no-brainer buy.
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Financial results tell a compelling story
One reason some investors are running away from software stocks is that they think artificial intelligence (AI) might displace many of their services. My view is that AI is an extremely useful tool that will improve productivity. That is already happening: innovative companies are evolving in tandem with AI and launching tools that make their customers’ lives easier. Shopify is doing the same. The company launched an AI website generator that can get the job done in a few minutes with just a basic description of what people want. Shopify has launched other AI tools, including an AI assistant that helps answer questions and navigate services more quickly and effectively.
Besides the work it is doing with AI, Shopify’s financial results remain excellent. In the first quarter, the company’s revenue grew by a strong 34% year over year to $3.2 billion, on the back of an almost 35% growth in gross merchandise volume, which reached $100 billion. The company’s free cash flow margin held steady at 15%. Shopify’s net loss narrowed to $581 million, up from the $682 million net loss recorded in the year-ago period. Excluding the impact of equity investments, the company reported a net income of $360 million, up 59% year over year.
True, Shopify expects its second-quarter revenue growth rate to be in the high twenties, a slight deceleration compared to the first quarter. However, the business still looks solid, despite fears that AI will wreak havoc.
Looking at the valuation concerns
There is another thing the bears can point to: Shopify’s shares look extremely expensive. The company is trading at about 56x forward earnings. That’s miles ahead of the 24.3x average for information technology stocks. At these levels, Shopify has little room for error, and anything that falls short of market expectations might trigger a sell-off. However, it’s worth pointing out that Shopify’s current forward price-to-earnings ratio is well below its average over the past two years.
