What Makes Shopify (SHOP) a Strong Momentum Stock: Buy Now?

Here at Zacks, we offer our members many different opportunities to take full advantage of the stock market, as well as how to invest in ways that lead to long-term success.

The Zacks Premium service makes this easier. It features daily updates of the Zacks Rank and Zacks Industry Rank; full access to the Zacks #1 Rank List; Equity Research reports; and Premium stock screens like the Earnings ESP filter. All of these can help you quickly identify what stocks to buy, what to sell, and what are today's hottest industries.

The service also includes the Focus List, which is a long-term portfolio of top stocks that boast a winning, market-beating combination of growth and momentum qualities.

Breaking Down the Zacks Focus List

If you could, wouldn't you jump at the chance for access to a curated list of stocks to kickstart your investing journey?

That's what the Zacks Focus List offers. It's a portfolio of 50 stocks that serve as a starting point for long-term investors to build their individual portfolios. The stocks included in the list are set to outperform the market over the next 12 months.

Additionally, each selection is accompanied by a full Zacks Analyst Report, something that makes the Focus List even more valuable. The report explains in detail why each stock was picked and why we believe it's good for the long-term.

The portfolio's past performance only solidifies why investors should consider it as a starting point. For 2020, the Focus List gained 13.85% on an annualized basis compared to the S&P 500's return of 9.38%. Cumulatively, the portfolio has returned 2,519.23% while the S&P returned 854.95%. Returns are for the period of February 1, 1996 to March 31, 2021.

Focus List Methodology

When stocks are picked for the Focus List, it reflects our enduring reliance on the power of earnings estimate revisions.

Earnings estimates, or expectations of growth and profitability, come from brokerage analysts who track publicly traded companies; these analysts work together with company management to analyze every aspect that may affect future earnings, like interest rates, the economy, and sector and industry optimism.

Investors also need to look at what a company will earn down the road. This is why earnings estimate revisions are so important.

When a stock receives upward earnings estimate revisions, it will likely get even more positive changes in the future. For instance, if an analyst raised their earnings outlook last month, they'll probably do so again this month, and other analysts will follow.

Harnessing the power of earnings estimate revisions is where the Zacks Rank comes in. The Zacks Rank is a unique, proprietary stock-rating model that utilizes changes to a company's quarterly earnings expectations to help investors build a winning portfolio.

There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise. Each one of these features is then given a raw score that's recalculated every night and compiled into the Rank. Using this data, stocks are classified into five groups, ranging from "Strong Buy" to "Strong Sell."

The Focus List is comprised of stocks hand-picked from a long list of #1 (Strong Buy) or #2 (Buy) ranked companies, meaning that each new addition boasts a bullish earnings consensus among analysts.

Because stock prices react to revisions, buying stocks with rising earnings estimates can be very profitable. Focus List stocks offer investors a great opportunity to get into companies whose future earnings estimates will be raised, potentially leading to price momentum.

Focus List Spotlight: Shopify (SHOP)

Ottawa, Canada-based Shopify Inc. provides a multi-tenant, cloud-based, multi-channel commerce platform that helps in starting, scaling, marketing, and running a business. Its platform and services are engineered for simplicity and reliability, while delivering a better shopping experience for customers everywhere.

On September 6, 2022, SHOP was added to the Focus List at $29.94 per share. Shares have increased 255.64% to $106.48 since then, and the company is a #2 (Buy) on the Zacks Rank.

13 analysts revised their earnings estimate upwards in the last 60 days for fiscal 2024. The Zacks Consensus Estimate has increased $0.11 to $1.24. SHOP boasts an average earnings surprise of 24.5%.

Earnings for SHOP are forecasted to see growth of 67.6% for the current fiscal year as well.

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Zacks Investment Research

Thursday, November 21, 2024

The Zacks Research Daily presents the best research output of our analyst team. Today's Research Daily features new research reports on 16 major stocks, including Broadcom Inc. (AVGO), Merck & Co., Inc. (MRK) and Qualcomm Inc. (QCOM), as well as a micro-cap stock, Natural Health Trends Corp. (NHTC). These research reports have been hand-picked from roughly 70 reports published by our analyst team today.

You can see all of today’s research reports here >>>

Broadcom’s shares have outperformed the Zacks Electronics - Semiconductors industry over the last two years (+208.0% vs. +157.2%). The Zacks analyst believes that strong demand for the company’s networking products are suitable for addressing the needs of an increasing AI workload and the growing need for fast networking in data centers. The acquisition of VMware has also been a plus.

However, a highly competitive market and a relatively low customer base have remained causes for concern. Also, Broadcom’s frequent acquisitions, like that of VMWare, have escalated integration risks.

(You can read the full research report on Broadcom here >>>)

Merck’s shares have underperformed the Zacks Large Cap Pharmaceuticals industry over the past two years (-8.8% vs. +15.2%). The Zacks analyst believes that generic competition for several drugs and rising competitive pressure, mainly on the diabetes franchise, will continue to be overhangs for the company. Also, there are concerns about Merck’s ability to grow its non-oncology business ahead of Keytruda’s loss of exclusivity later in the decade.

Yet, with continued label expansion into new indications, particularly earlier-stage launches, Keytruda is expected to see continued growth. Animal health and vaccine products have also been core growth drivers.

(You can read the full research report on Merck here >>>)

Shares of Qualcomm have underperformed the Zacks Wireless Equipment industry over the past year (+21.0% vs. +43.2%). Per the Zacks analyst, a shift in the shares among OEMs at the premium tier has reduced Qualcomm's near-term opportunity to sell integrated chipsets from its Snapdragon platform.

Aggressive competition in the mobile phone chipset market is also likely to hurt Qualcomm's profits in the future. High operating expenses and R&D costs have remained a headwind. Qualcomm is also expected to face softness in demand from China.

However, with the accelerated rollout of 5G technology, it is benefiting from investments toward building a licensing program in the mobile space. The company formed a strategic collaboration with Google to develop Generative AI digital cockpit solutions.

(You can read the full research report on QUALCOMM here >>>)

Shares of Natural Health Trends have underperformed the Zacks Consumer Products - Discretionary industry over the past year (+1.8% vs. +21.4%). Per the Zacks analyst, a declining active member base remains the biggest concern for the company. It faces liquidity challenges and high operating expenses. Dependency on key markets and intense competition pose additional risks.

However, expansion into new markets and improvement in cost management bode well.

(You can read the full research report on Natural Health Trends here >>>)

Other noteworthy reports we are featuring today include Shopify Inc. (SHOP), Fiserv, Inc. (FI) and Marsh & McLennan Companies, Inc. (MMC).

Mark Vickery

Senior Editor

Note: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz publishes a new article, please click here>>>

Today's Must Read

Keytruda to Remain Merck's (MRK) Key Top-Line Driver

Strong Demand for Networking Products Aids Broadcom (AVGO)

Qualcomm (QCOM) Poised to Gain from Transition to Edge Firm

Featured Reports

Fiserv (FI) Gains From Skytef Buyout, Amid High Competition

Per the Zacks analyst, the Skytef acquisition strengthens Fiserv's distribution network and point-of-sale. High competition from other players is an overhang.

Marsh & McLennan (MMC) Strategic Buyouts Aid, Expenses High

Per the Zacks analyst, multiple acquisitions help Marsh & McLennan expand geographically, and diversify its portfolio. However, escalating expenses continue to trim margins.

Increase in New Insurance Written Aid MGIC Investment (MTG)

Per the Zacks analyst, MGIC Investment is set to grow on higher insurance in force and annual persistency, lower claims and a strong capital position. Yet, rising expenses weigh on margin expansion.

Pre-Salt Reserves Help Petrobras (PBR), Debt Mountain Hurts

The Zacks analyst believes Petrobras' stakes in Brazil's lucrative pre-salt oil reservoirs should improve its earnings outlook, but is concerned about the company's massive $44,251 million debt load.

Customer Growth, Investment Aid Pinnacle West Capital (PNW)

Per the Zacks analyst, Pinnacle West is gaining from customer additions, which is creating demand. Investment in infrastructure and energy generation is aiding it to serve customers efficiently.

Quanta (PWR) Benefits From Strong Demand Amid Labor Woes

Per the Zacks analyst, Quanta is benefiting from robust demand for its services and accretive acquisitions. However, labor and supply chain woes are major concerns.

Ongoing Menu Expansion Aids QIAGEN (QGEN), Macro Woes Stay

Per the Zacks analyst, QIAGEN's robust R&D spending to expand the testing menu across key platforms is encouraging. Yet, macroeconomic volatilities, including the challenges in China, raise concerns.

New Upgrades

Corcept (CORT) Rides on Robust Korlym Sales Performance

Per the Zacks analyst, Corcept's sole drug, Korlym, approved for treating Cushing's syndrome, is driving the top-line. The company is also making good progress with its promising pipeline candidates.

Focus on Cost Savings to Bolster McCormick's (MKC) Margins

Per the Zacks analyst, McCormick's focus on cost-saving plans will continue to enhance its margins. The company expects its fiscal 2024 gross margin to increase by 50 to 100 basis points.

Product Rollouts & Growing Merchant Base Aid Shopify (SHOP)

Per the Zacks analyst, Shopify is benefiting from expanding merchant base driven by applications like Shopify Bill Pay, Tax platform, Collective and Marketplace Connect solutions.

New Downgrades

Decline in Vehicle Production, Rising Debt Ail Magna (MGA)

Per the Zacks analyst, lower-than-anticipated vehicle production in North America and Europe is likely to hurt Magna's top-line growth. Rising debt levels are also concerning.

High Costs, Falling Revenues Hurt Affiliated Managers (AMG)

Per the Zacks analyst, weak top-line performance, and elevated costs are major near-term headwinds for Affiliated Managers. The presence of substantial intangible assets on its balance sheet is a woe.

Spectrum Brands (SPB) Struggles With Numerous Headwinds

Per the Zacks analyst, Spectrum Brands has been witnessing geopolitical and macroeconomic uncertainty for a while. In addition, foreign currency translations are acting as deterrents.

Zacks Investment Research

Growth stocks are often shares of innovative companies in sectors such as technology, healthcare, cannabis, or consumer services, where rapid expansion or disruptive innovation has the potential to drive stock performance. These stocks are ideal for patient investors who can withstand the short-term headwinds that an evolving company faces.

The Walt Disney Company and Shopify are two examples of growth stocks with “buy” ratings from analysts. Both companies just reported another strong quarter, making Wall Street optimistic about their long-term potential.

#1. The Walt Disney Company

The Walt Disney Company has long been a force in the entertainment and media industries, enthralling audiences worldwide with its iconic characters, theme parks, and blockbuster franchises.

Disney can't really be called a “pure” growth stock, as it has been in the industry since 1923. However, as the entertainment industry evolves, Disney continues to fight to maintain its position in the highly competitive streaming landscape.

Valued at $206.9 billion, DIS stock has gained 26.9% so far this year, compared to the S&P 500 Index’s gain of 23.7%.

Despite having been in the game for a long time with a legacy portfolio, the competitive streaming landscape, which includes Netflix , Amazon , and Apple , has put pressure on Disney's subscriber growth and retention efforts.

However, under CEO Bob Iger's leadership, Disney has taken strategic steps to regain investor trust. Disney’s growth story is one of adaptation and evolution. Aside from streaming, the company's portfolio includes intellectual property (IP) from Pixar, Marvel, and Star Wars, as well as Disney Experiences like theme parks, resorts, cruises, and more.

In the fourth quarter of fiscal 2024, diluted earnings per share (EPS) increased by an impressive 79%, while revenue increased by 6%, driven by growth in the entertainment segment. At the end of the quarter, the company had 174 million Disney+ Core and Hulu subscribers, as well as more than 120 million Disney+ Core paid subscribers.

For the full fiscal year 2024, revenue increased by 3% to $91.4 billion, while earnings more than doubled to $2.72 from $1.29 in fiscal 2023.

Disney is also a dividend stock, yielding 1.58% with a forward payout ratio of 33.3%. This implies that its dividends are currently sustainable, with room for future dividend increases. The company intends to align dividend growth with earnings growth in the long run. In addition, it plans to repurchase $3 billion in shares in fiscal 2025.

Looking ahead, management expects high-single-digit adjusted earnings growth in fiscal 2025 but double-digit EPS growth in both fiscal 2026 and 2027. Analysts predict a 9.3% increase in earnings in fiscal 2025, followed by 11.8% growth in fiscal 2026.

Overall, Wall Street analysts rate Disney stock as a "strong buy.” Of the 29 analysts who cover DIS, 19 recommend it as a "strong buy," three suggest a "moderate buy," and seven rate it a "hold.”

Analysts have set a mean price target for Disney stock of $125.92, which is 10.2% higher than current levels. Its high target price of $140 indicates an upside of 22.6% over the next 12 months.

Despite the competition, Disney's long-term prospects remain promising thanks to its unparalleled brand strength, extensive intellectual property library, and diverse revenue streams.

Disney's stock is trading at 20 times forward 2025 earnings and nine times forward sales. Disney is also the less expensive stock to buy right now relative to its peer Netflix, which has a forward P/E ratio of 36x.

#2. Shopify

With a market cap of $134.1 billion, Shopify has transformed the e-commerce landscape by enabling millions of businesses around the world to set up online stores using its platform.

Investors and analysts are optimistic about the company's consistent revenue growth, which is driven by subscription-based services and merchant solutions. Shopify's stock is up 34% year-to-date, outpacing the broader market.

After a period of slowdown in the post-pandemic market, Shopify's growth rate has picked up in recent quarters.

In its most recent third quarter, Shopify reported 26% revenue growth to $2.1 billion, highlighting resilience amid the global e-commerce slowdown. Gross Merchandise Volume (GMV) also increased 24% year-over-year, driven by increased merchant adoption and enhancements to the platform's capabilities with artificial intelligence (AI). Q3 also marked the company's sixth consecutive quarter of revenue growth of more than 25%, excluding its logistics operations.

While revenue growth remains robust, Shopify's high reinvestment rate in innovation and infrastructure has yet to put it on track to sustainable profitability. This is not unusual for a growing stock. However, in the third quarter, net income came in at $828 million, compared to $718 million in the year-ago quarter.

The company generated $421 million in free cash flow (FCF), representing an FCF margin of 19%. Management expects revenue growth to be in the mid- to high-twenties percentage rate in Q4, while the free cash flow margin could be around 21%. Shopify continues to attract small and medium-sized businesses (SMBs) searching for low-cost e-commerce solutions.

Analysts covering Shopify stock expect revenue and earnings to increase by 24.5% and 79% for the full year 2024. Revenue and earnings could further increase by 22% and 15.3% in 2025.

Shopify is now valued at 12 times forward 2025 estimated sales, compared to its five-year historical average of 23.4 times sales. Shopify's stock remains an appealing growth story for long-term investors. Its strong brand reputation and innovative use of AI and machine learning position it well to capture a larger share of the e-commerce market.

After SHOP's robust Q3 performance, Evercore ISI analyst Mark Mahaney maintained his “buy” rating for the stock. The analyst stated, “Despite the high valuation multiples, the premium fundamental trajectory of Shopify’s business, characterized by sustained revenue growth and rising margins, supports the Buy rating.”

Overall, Wall Street rates SHOP stock a “moderate buy.” Of the 44 analysts covering SHOP, 25 rate the stock a “strong buy,” one has a “moderate buy” recommendation, and 18 suggest a "hold.”

Based on its mean price target of $111.50, SHOP stock has an upside potential of 5.1% from current levels. Plus, its high target price of $140 suggests the stock could go as high as 31% over the next 12 months.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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Increased profitability, strong cash flow, and innovation into artificial intelligence is starting to make Dropbox DBX stock appealing among the Zacks Internet-Services Industry, which is in the top 14% out of 250 Zacks industries.

With its cloud-based collaboration platform expanding, Dropbox shares may appeal to growth and value investors. Considering such, Dropbox stock sports a Zacks Rank #1 (Strong Buy) and lands the Bull of the Day after exceeding its Q3 expectations earlier in the month.

Increased Profitability Overview

Operating as a file hosting service, Dropbox synchronizes personal cloud and enterprise software to create, access, and share digital content.

Dropbox’s paying users stood at 18.24 million at the end of Q3 2024, up from 18.17 million in the comparative quarter. Enhancing its operating efficiency, Q3 EPS was slightly up to $0.60 and impressively topped the Zacks EPS Consensus of $0.52 a share.

Third quarter sales of $638.8 million increased 1% from a year ago and edged estimates of $636.93 million. Most intriguing and indicative of more upside in Dropbox stock is that earnings estimate revisions for fiscal 2024 and FY25 are up 7% and 9% in the last 30 days respectively. Furthermore, Dropbox's annual earnings are now expected to increase over 20% this year and are projected to rise another 9% in FY25 to $2.62 per share.

Stronger Cash Flow

Piggybacking on Dropbox's operational efficiency, free cash flow increased 9% year over year to a quarterly record of $270.1 million as shown in the chart below.

Dropbox Dash (AI Prospects)

Making good use of its free cash flow, Dropbox has planned to expand and innovate its platform. During its Q3 report, Co-founder and CEO Drew Houston stated Dropbox plans to leverage its customer base, trusted brand, and scale infrastructure to deliver on the company’s next phase of growth.

Expansion into AI may interest investors in particular, with Dropbox Dash being an AI-powered universal search tool designed to help users find, organize, and share content across various apps and platforms.

Dropbox’s Attractive P/E Valuation

With Dropbox focusing on the next phase of growth, its valuation should attract value investors. To that point, DBX trades under $30 and at a very reasonable 11.7X forward earnings multiple.

This is a sharp discount to the S&P 500’s 25.1X and the Zacks Internet-Services average of 23.5X with some of the notable names in the space being Shopify SHOP and Uber Technologies UBER.

Bottom Line

Positive earnings estimate revisions are starting to magnify Dropbox’s attractive P/E valuation and EPS growth. With now appearing to be an ideal time to buy Dropbox’s stock, the company’s innovation is starting to make DBX look like a viable long-term investment as well.

Zacks Investment Research

Here are two stocks with buy rank and strong momentum characteristics for investors to consider today, November 20:

Brookfield Asset Management Ltd. BAM: This real estate investment company has a Zacks Rank #1 and witnessed the Zacks Consensus Estimate for its current year earnings increasing 2.1% over the last 60 days.

Brookfield Asset Management Ltd. Price and Consensus

Brookfield Asset Management Ltd. price-consensus-chart | Brookfield Asset Management Ltd. Quote

Brookfield Asset Management's shares gained 39.8% over the last three months compared with the S&P 500’s advanced of 5.1%. The company possesses a Momentum Score of A.

Brookfield Asset Management Ltd. Price

Brookfield Asset Management Ltd. price | Brookfield Asset Management Ltd. Quote

Shopify Inc. SHOP: This commerce company has a Zacks Rank #1 and witnessed the Zacks Consensus Estimate for its current year earnings increasing 1.8% over the last 60 days.

Shopify Inc. Price and Consensus

Shopify Inc. price-consensus-chart | Shopify Inc. Quote

Shopify's shares gained 37.4% over the last three months compared with the S&P 500’s advanced of 5.2%. The company possesses a Momentum Score of B

Shopify Inc. Price

Shopify Inc. price | Shopify Inc. Quote

See the full list of top ranked stocks here

Learn more about the Momentum score and how it is calculated here.

Zacks Investment Research