Investing in growth stocks can be an excellent strategy to boost your portfolio’s value, so long as you have balanced it well. Allocating investment capital to growth stocks can deliver substantial returns faster than with many well-established blue-chip stocks. However, the high reward comes with the potential of high risk.
To this end, Shopify (TSX:SHOP) seemed like the perfect candidate that could do no wrong for a while after its initial public offering (IPO). Then, the tech bubble burst, and Shopify went down with it. As of this writing, Shopify stock is down 25% from its 52-week high and over 57% from its all-time high.
While the downturn seems alarming, it might be the right holding to consider for your portfolio today.
Since its IPO, Shopify stock kicked off a rapid upward rally on the stock market. Within three years, it blew past Royal Bank of Canada as the largest TSX stock by market capitalization.
The multinational e-commerce company headquartered in Ottawa experienced unprecedented growth, largely due to the pandemic. Businesses worldwide needed to establish or grow their online presence, and providers like Shopify were there to fulfill that demand.
As the leading e-commerce platform provider, Shopify greatly benefitted from the surge in demand for e-commerce solutions. Its user base and revenue grew rapidly, leading to a completely unexpected growth in share prices. Social distancing and lockdowns forced consumers to continue shopping online throughout the pandemic.
Once the world began moving into a post-pandemic era, it became clear that Shopify’s growth was unsustainable. While many people still buy online, consumer behaviour has rebalanced to a large degree. Shopufy’s growth rates decelerated, and many investors pulled out. Accompanied by a pullback in the tech sector and a harsh broader economic environment, share prices decreased much further.
As of this writing, Shopify stock trades for $91.91 per share, reflecting a forward price-to-earnings ratio of 67.57. While it is still expensive after the decline, it might be arguably undervalued, considering future growth potential.
Regardless of where the economy heads in the next couple of years, Shopify is a company with solid trends that support its core business. The company still boasts a good business model with its Software-as-a-Service approach. Even though consumer trends have rebalanced, the e-commerce industry is expected to grow worldwide.
Shopify has become a profitable company, delivering several quarters of positive earnings. Despite being expensive, the stock undoubtedly has investor sentiment backing it. Analysts anticipate that Shopify will continue to capture a bigger share of the growing industry.
The fact that Shopify is an established business providing infrastructure for an industry slated to grow significantly over the years makes it an attractive investment to consider. While broader economic factors being unfavourable still can trigger selloffs in the near term, the business has several high-margin verticals that should help its fundamentals in the long run.
As long as Shopify doesn’t stagnate and continues to innovate and expand, it might be an excellent bet for long-term, growth-seeking investors.
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