1 Beaten-Down Stock to Buy and Hold for a Decade

Shopify (NASDAQ: SHOP) hasn't performed well this year. The stock is down 8% to date, as of writing, amid valuation concerns and fears that artificial intelligence (AI) will replace many of its services, a sentiment that has weighed on much of the software industry. However, the company's second-quarter update, released on Aug. 5, breathed some life into the stock. Let's look into Shopify's latest financial results and discuss why the stock still boasts attractive long-term prospects.

Evolving with AI

In the second quarter, Shopify's revenue grew by 34% year over year to $3.6 billion. The company's operating income jumped almost 68% to $488 million, while its net income (excluding the impact of equity investments) was $439 million, up 30% from the year-ago period. Shopify's free cash flow was $654 million, up 55% year over year, while its free cash flow margin was 18%, higher than the 16% reported in the prior-year quarter. Shopify's guidance was pretty good, too. The company expects revenue growth to be in the low thirties for the third quarter.

Image source: The Motley Fool.

Why did Shopify perform so well? Part of the answer is that the company is launching AI-powered tools that are meaningfully impacting merchants' businesses, leading to higher gross merchandise volume (GMV) and revenue for the e-commerce specialist. One of those tools is Shopify Catalog, which uses AI to help shoppers discover and purchase products through AI assistants. Shopify Catalog provides AI agents with an up-to-date library of millions of items across merchants' stores, enabling these items to appear in AI-powered search results. The way consumers look for products -- and buy them -- is evolving through AI, and Shopify isn't being left behind. The company's efforts are being rewarded.

Shopify has other AI tools, including a store builder that can get the job done quickly with a basic description of what merchants want. These initiatives should help Shopify tap into the massive remaining addressable market ahead. E-commerce still accounts for less than 20% of retail transactions even in the U.S., one of the more penetrated markets. That will change over the next decade. It's only a matter of which companies will capitalize on this. And, if anything, AI hasn't harmed Shopify's market position. It has improved its standing, as evidenced by the company's latest financial results.

Meanwhile, Shopify has other strengths. The company powers about 30% of e-commerce software sites in the U.S. Shopify also benefits from a strong competitive advantage through high switching costs and network effects within its app store, which features thousands of options for merchants to customize their stores. Lastly, even at 61.7x forward earnings -- versus an average of 22.1x for information technology stocks -- the company is worth the premium given, the vast opportunities ahead and its improving business. Shopify's shares are still in the red this year despite its post-earnings surge. It's not too late to buy the stock on the dip.

Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.