One of the largest holdings across my Stocks and Shares ISA and SIPP is Shopify (NASDAQ:SHOP). Combined, it’s my third-largest position, a spot that was cemented yesterday (5 August) when it popped 17% after a huge second quarter.
The e-commerce software powerhouse also gave rosy, upgraded guidance for the third quarter. But with the growth stock up 150% in just two years, and trading expensively, I’ve now got a decision to make.
Should I buy, sell, or hold Shopify shares?
Blockbuster quarter
Shopify’s all-in-one platform powers millions of businesses in more than 175 countries. Impressively, it now commands 14% of the massive US e-commerce market, second only to Amazon.
Further penetration is expected, with a new Shopify entrepreneur getting their first sale every 26 seconds. Some of the global brands being powered by the platform in recent quarters include Starbucks and L’Oréal.
Turning to the quarter, revenue jumped 34% to $3.58bn, above expectations for $3.45bn, and adjusted earnings per share (EPS) of $0.42 beat estimates ($0.40). The free cash flow margin improved to 18% from 16%.
Growth was fuelled by a 32% increase in gross merchandise volume (GMV), which is the total amount that Shopify-powered merchants processed. It came in at a whopping $115.6bn — the company’s fifth straight quarter of GMV growth above 30%!
Looking ahead, management expects revenue to grow at a low-30’s percentage rate, well above analysts’ estimate of a 26.3% increase. And the free cash flow margin will potentially push into the low-20’s.
What AI risk?
We power every kind of business, and with AI, we’re expanding what’s possible for all of them. No one else comes close.
President Harley Finkelstein.
Before yesterday, the stock was down 23% year to date, with Shopify caught up in the broader software sell-off. Partly this reflected fears that consumers using AI apps and shopping assistants would skip merchant websites altogether.
I thought some of these concerns were overblown. Shopify handles everything from processing payments and fraud protection to merchant financing. This e-commerce infrastructure is not easily replaced by AI.
And rather than being disrupted by AI, most Shopify merchants are benefiting from it. Instead of ChatGPT and Gemini scraping the internet, they can index over 1bn structured product data from Shopify.
On the earnings call, Finkelstein said: “AI search has been particularly helpful to some of the smaller brands…These are brands that also happen to make up the majority of Shopify’s merchant base, smaller businesses with specialised products built for a particular customer.”
During the quarter, 75% of its purchases made via AI search were niche products outside the top 100 categories. So AI shopping is matching products with specific buying intent (however niche) rather than serving up generic search engine keyword results.
This specificity is benefiting more Shopify merchants and driving growth.
My move?
As a shareholder, I’m very pleased with the company’s progress. However, after the pop, the stock trades at around 65 times forward earnings. That leaves very little room for a slowdown in growth beyond the third quarter.
The cost of living also remains a problem for many consumers, adding risk for anyone considering the stock. Therefore, I’m going to sell a few shares here and recycle profits.
I see a few ideas, including a couple of new ones.
Should you invest £5,000 in Shopify right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Shopify made the list?
Ben McPoland owns shares in Shopify.
This story originally appeared on Motley Fool
