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Why Should You Retain Shopify (SHOP) Stock in Your Portfolio?

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A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to retain certain stocks that have enough potential but are weighed down by tough market conditions.

Here we focus on Shopify Inc. (SHOP - Free Report) , a stock with expected long-term earnings per share growth rate of 25%. The company’s earnings are expected to register growth of 93.7% and 116.9% in 2018 and 2019, respectively.

The company’s price performance over the past year looks impressive. Shares of Shopify have gained 28.9%, against the industry’s decline of 26.6%.

We believe the stock has the potential to sustain momentum. The company’s strategic acquisitions and diversified expanding merchant base are the primary reasons fueling optimism. Shopify continues to launch a number of merchant-friendly applications to meet the requirements of a dynamic retail environment, in turn bolstering its merchant base.

Let’s discuss them in detail.

Growth Drivers

Shopify delivered third-quarter 2018 adjusted earnings of 4 cents per share comparing favorably with the Zacks Consensus Estimate loss of 4 cents.

Total revenues surged 58% from the year-ago quarter to $270.1 million, comfortably outpacing the Zacks Consensus Estimate of $257 million. The figure also fared better than the guided range of $253-$257 million.

Robust performance of Shopify Shipping and Shopify Capital also aided growth. Markedly, revenues of both Shopify Shipping and Shopify Capital have “doubled” year over year.

Management remains positive about the company’s expanding partner ecosystem that aids it to identify and reach merchants who are otherwise inaccessible. The total number of apps registered in the App store amount to more than 2,200. More than 16,500 partners referred merchants to Shopify in the past 12 months.

The company unveiled various enhancements and new technologies aimed at improving selling experience of merchants.

Shopify has introduced Shopify AR in a bid to enrich user engagement. For instance, mobile shoppers will be able to view 3D models for assessing whether the purchase of cycles, furniture, among others, will fit in the physical space properly.

Recently, it also revamped its Shopify App Store, in order to provide an enhanced experience on mobile and desktop.

Further, Shopify rolled out a new feature, named Locations, enabling customers to track orders seamlessly. In the last reported quarter, the company introduced Shopify Payments in Germany.

In an effort to make the platform more merchant friendly, Shopify is working on extending language capabilities beyond English. The focus on local languages is aiding in bolstering international presence. We believe this inclusive move will boost engagement and in turn increase adoption going forward.

Moreover, the company will reap benefits from investments in latest technological developments such as virtual reality (“VR”) and augmented reality (“AR”), going forward.

Shopify has been developing various apps, including various AR based applications to streamline customer experience.

Moreover, sales channels like Google Pay, Facebook Messenger, Instagram, Pinterest, eBay (EBAY - Free Report) and Amazon (AMZN - Free Report) continue to attract new merchants. The availability of Apple Pay, Google Pay and the addition of Canada Post as sales channels are expected to be other tailwinds.

These innovative initiatives to enhance visibility across physical outlets and explore new markets are anticipated to significantly expand merchant base, going ahead.

Bottom Line

The aforementioned factors positively impacted Shopify’s performance in the last reported quarter. In fact, the company outperformed the Zacks Consensus Estimate in the trailing four quarters, delivering average positive surprise of 195%. We believe the upbeat performance will continue in the quarters ahead, consequently giving investors enough reasons to remain optimistic on the stock.

Zacks Rank & Stocks to Consider

Currently, Shopify has a Zacks Rank #3 (Hold).

Infineon Technologies AG (IFNNY - Free Report) sporting a Zacks Rank #1 (Strong Buy) is worth considering in the broader technology sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

The projected earnings growth rate (3-5 years) for Infineon is 8.62%.

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