Could Buying Shopify Stock Today Set You Up for Life?

Key Points

• Over the last three years, Shopify's shares have been on a tear.

• The stock has recorded a compound annual gain of some 70%.

• Shopify is leveraging AI-powered tools to drive up profitability.

• 10 stocks we like better than Shopify ›

One path to successful investing is beating the market. Granted, it's easier said than done, but it is possible. Today, let's take a look at one stock that has been doing just that: Shopify (NASDAQ: SHOP).

Shares of the e-commerce platform have outperformed most of the market for several years. As of this writing, the stock has advanced 38% year to date, easily beating the S&P 500, which has logged a 10% gain in that period. Moreover, Shopify's stock is up almost 400% over the last three years, having recorded a compound annual return of 70%, as compared to the S&P 500's 18%.

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So, why is Shopify's stock soaring? In short, it all comes down to execution. The company continues to post excellent growth numbers, and it has turned the corner when it comes to delivering consistent profitability. Let's see why it could continue to be an excellent stock to own.

Image source: Getty Images.

Shopify is firing on all cylinders

Shopify makes money through the operation of its online storefronts for retail businesses of all sizes. About 25% of its revenue -- $656 million in its most recent quarter, ended June 30 -- is from direct subscription revenue. The remaining 75% -- $2 billion in its most recent quarter -- comes from merchant solutions, which include payment processing fees, currency conversion costs, and shipping.

As the number of merchants on Shopify's network increases -- and the amount of goods they sell also grows -- Shopify's revenue base naturally expands. This is one of the prime reasons why Shopify has delivered consistent revenue growth above 20% dating back to 2022. Indeed, over the last three years, Shopify has averaged quarterly revenue growth of 26%. In its most recent quarter, revenue growth accelerated to near a three-year high of 31%, showing that the company's growth trajectory remains very potent.

What's more, Shopify's investment thesis isn't "growth at all costs." Increasingly, the company's margins and overall profits are taking center stage.

For example, after years of struggling with negative profit margins, Shopify has flipped the script. Operating margin now stands at nearly 14%. Accordingly, net income has soared. Shopify has generated $2.3 billion in net income over the past 12 months. The company credits increased scale, upsales of merchant solutions, and its new suite of AI-powered tools for delivering its surge in revenue and profits.

Is Shopify stock a buy now?

While Shopify's recent success is extremely impressive, the real question is whether it will continue. On that front, there are risks.

First of all, Shopify relies on small businesses, which make up the majority of its customer base. If a recession were to strike, small businesses are often most affected, meaning that Shopify's rapid growth could quickly evaporate. Moreover, trade and tariff policies remains in flux. Shopify's merchant base could suffer if costs for goods and shipping increase.

Finally, Shopify isn't a cheap stock. It trades at a price-to-sales (P/S) ratio of around 19. That's far above the average for most stocks (around 3.3), and it's even high relative to its own history. Over the past three years, Shopify stock has had an average P/S ratio around 13.

In short, Shopify stock isn't for everyone. However, for those investors seeking a dynamic, growth-oriented stock with exposure to e-commerce, Shopify is a name to consider.

Should you invest $1,000 in Shopify right now?

Before you buy stock in Shopify, consider this:

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Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.