Baird’s Bullish on Shopify stock. Here’s What to Make of It.

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SHOP stock - Baird’s Bullish on Shopify stock. Here’s What to Make of It.

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Colin Sebastian of Baird recently released a bullish statement on Shopify (NYSE:SHOP) stock, in which he claimed that “investors will likely remain focused on consumer spending headwinds near term, we believe improving merchant trends could improve visibility for growth and mitigate some of the competitive concerns.”

I’m in complete agreement with Sebastian. Shopify is a “best-in-class” solution, which probably won’t correlate as much with an economic downturn as other stocks. The company has developed a robust market position with a product differentiation strategy, allowing it to sustain its financial performance during turbulent economic times.

Shopify strolled past its fourth-quarter earnings estimates by 6 cents per share. The company has experienced tremendous success during its past financial year. Its merchant and subscription revenue grew by 41% and 26%, respectively. Furthermore, SHOP managed to bolster its gross margins by 37% during its previous quarter, leading to a 60% year-over-year improvement. Shopify’s improving gross margin indicates that it is bringing its product to market more efficiently than it did in the past. This could lead to larger operating margins in the future.

Baird’s analysts alluded to SHOP’s monetization growth aspects, stating that the company’s diverse product offerings could add integrated value to the business. I’d say that Shopify’s target market is one of the best a modern-day enterprise could have. What’s my premise? Well, in the U.S. alone, small to medium enterprise growth has reached 9.8% between 2017 and 2021, suggesting that industries are becoming more fragmented. Additionally, Shopify’s business model is to increase the availability of affordable high-level technology, tools, and applications. This could bode well in a growing start-up or early-stage business environment.

SHOP stock is undervalued. Yes, its price-to-earnings ratio may seem inflated at 92.07x, but we need to emphasize the price-to-earnings-growth (PEG) metric. SHOP has a PEG of 0.03, meaning that its earnings-per-share growth has outpaced its stock price growth by 33.33x, leaving an abundance of value on the table for investors to take advantage of.

On the date of publication, Steve Booyens held an indirect long position in SHOP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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