Shopify (SHOP) Is an Exceptional Growth Stock: Three Key Reasons

Growth stocks have a special appeal among investors, as their potential for above-average financial growth can attract significant market interest and lead to outstanding returns. Nevertheless, identifying a genuinely promising growth stock can be a challenging task.

Growth stocks are inherently volatile and carry greater risks. This means that investors may face losses if a company's growth trajectory comes to an end or begins to decelerate.

Fortunately, tools like the Zacks Growth Style Score can simplify the hunt for exceptional growth stocks. This system examines various aspects beyond basic growth indicators, focusing on a company's actual growth potential.

Shopify (SHOP) is one stock that currently gets a favorable recommendation from this proprietary model. Not only does it have a solid Growth Score, but it also boasts a top Zacks Rank.

Research indicates that stocks exhibiting the strongest growth characteristics tend to outperform the broader market. Particularly, those stocks that achieve a Growth Score of A or B in tandem with a Zacks Rank of #1 (Strong Buy) or #2 (Buy) generally see even better returns.

Here are three crucial factors that position Shopify as a great growth investment right now.

Earnings Growth

Earnings growth is a critical criterion for investors, as stocks with notable profit increases often attract considerable attention. For growth-focused investors, a double-digit earnings growth rate is highly desirable, as it is typically viewed as a sign of robust future prospects and prospective stock price increases.

Shopify exhibits a historical earnings per share (EPS) growth rate of 69.1%. However, investors should prioritize projected growth. The company's EPS is forecasted to rise by 19.3% this year, significantly outperforming the industry average of 14%.

Strong Asset Utilization Ratio

The asset utilization ratio, also known as the sales-to-total-assets (S/TA) ratio, is often underestimated by investors, yet it serves as a vital indicator in growth investing. This metric highlights how effectively a company utilizes its assets to generate sales.

Currently, Shopify has an S/TA ratio of 0.71, meaning the company generates $0.71 in sales for every dollar of assets. In comparison, the industry average stands at 0.67, indicating Shopify's superior efficiency.

Efficiency in generating sales is essential, but sales growth is also crucial. Shopify has favorable prospects in this area as well, with its projected sales growth of 21.7% this year, while the industry averages a mere 5.8%.

Positive Earnings Estimate Revisions

In addition to the metrics mentioned, trends in earnings estimate revisions are also important for investors to consider. A favorable trend in revisions is generally a positive sign. Evidence suggests a strong correlation between earnings estimate revisions and short-term stock price movements.

Currently, earnings estimates for Shopify have been revised upward. The Zacks Consensus Estimate for this fiscal year has increased by 0.5% in the past month.

Conclusion

Shopify has achieved a Growth Score of B based on various factors, including those discussed here, and holds a Zacks Rank of #2 due to the positive earnings estimate revisions.

This combination points to Shopify's potential to outperform the market, making it an excellent option for growth investors.

Growth, Stocks, Investment