Shopify Stock: An Undervalued Growth Gem?

By Markets Fool.com


Image source: Shopify.

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Shopify (NYSE: SHOP), the e-commerce platform company that has only been publicly traded for 18 months, reported an impressive Q3 on Nov. 2. Shopify designs, sets up, and manages online stores for variety of different companies.

During the quarter, sales nearly doubled from $52.8 million in Q3 2015 to $99.6 million.Shopify's stock rose slightly following the news but has since fallen. Even though the stock still looks expensive based on the company's growing loss, here's why Shopify's long-term growth potential looks like a solid play.

Shopify's impressive growth continues

Making up Shopify's 89% year-over-year revenue growth was a 69% rise in subscription revenue as the total number of members rose from 200,000 in Q3 2015 to 325,000, as well as a full 114% jump inmerchant solutions thanks to growth in Shopify Payments. One especially important number for the quarter was that monthly recurring revenue -- calculated asthe average subscription fee by total number of subscribers -- grew 67% from a year ago to$16.3 million.

During the quarter, Shopify introduced Apple Pay to its merchants as a payments option, as well as integration with Facebook (NASDAQ: FB) Messenger which has widened the reach of merchants of all sizes and made transactions simpler. Shopify also launched its own mobile app to make taking payments easier for mobile customers. All of this has helped Shopify customers to sell more, which helped the total dollar value of all orders processed through Shopify to double over last year to$3.8 billion.

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Image source: Shopify

Is Shopify stock undervalued?

Shopify has made some incredible strides in its short history. It has helped sellers of all sizes; from thousands of solo-entrepreneurs to major companies such as Amazon.com, the Los Angeles Lakers, the New York Stock Exchange, and many more. The advancements in the third quarter are testament to the company's operating success and ability for potential future growth.

The costs necessary to create this demand and support continued growth hasn't been cheap, and Shopify's operating costs during the quarter soared 88% over the prior year. With such large costs and investments, the company reported a loss of $0.11 during the quarter, up from a $0.06 loss a year ago.

Image source: Shopify

Still, the loss was less than expected, and the company guided that it plans to break even in 2017. During the call, Shopify CFO Russ Jones said the following when discussing the companies aims: "Although these will require investments, some with longer payback periods than other, we continue to feel comfortable with our profitability target for the fourth quarter of 2017."

While the company is still bleeding money in the meantime, itlooks to have plenty of resources to continue investing aggressively for growth until that breakeven point. During the second quarter, the company completed a successful additional stock offering, which helped cash to increase from $190 million in December 2015,to $400 million by the end of Q3,giving the company more time to continue investing without worrying too much about funding that growth.

Shopify's growing loss certainly makes its lofty price of 17 times book value hard to swallow. However, having a timeline for breakeven, plenty of cash to tide it over, and with growing sales and new partnerships, Shopify continues to look like a great stock to buy and hold for what should be continued growth ahead.

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Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Facebook, Shopify, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.