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Shopify (NYSE: SHOP) stock is making a run for new highs right now, but there’s a good chance it could set further records heading into 2024. The online marketplace platform provider has been slashing its cost infrastructure, and these savings are hitting the income statement just as sales trends are reaccelerating.

As you might expect, these trends are having a powerful impact on Shopify’s bottom line as we head into the crucial holiday shopping season. Wall Street has responded to the positive news by pushing shares higher, too. So let’s take a look at why Shopify might still be worth putting in your portfolio even after its rally so far this year.

1. The best defense is a good offense

Shopify is getting a lot of approval from Wall Street for its cost cuts this year, but investors should be just as excited about its fantastic revenue trends. Sales volumes on its platform jumped by $10 billion, or 22%, this past quarter.

The company saw similar expansion rates in its subscription services and even faster growth in its payments processing services. Overall, revenue was up 30% year over year after adjusting for currency exchange rate swings. “We’re extremely pleased with our financial performance this quarter,” CFO Jeff Hoffmeister said in an early November press release. Investors were thrilled to hear that management is projecting nearly the same level of growth for the full 2023 fiscal year.

2. Moving those margins

There’s no ignoring Shopify’s improving financial standing, though. Its gross profit margin jumped to 53% of sales last quarter from 49% a year ago, primarily thanks to the company’s sale of the logistics business. There were other big factors pushing profits higher as well. Don’t forget that Shopify raised prices that it charges merchants for their subscriptions. Costs have come down in other parts of the business outside of logistics, too.

On the other hand, Shopify’s margins are being pressured by the company’s strong payments processing growth business. Yet investors have to be happy with the big picture here. Shopify is now converting about 7% of revenue into operating profit. A year ago, the business was generating a loss by that metric of a whopping 25% of sales.

3. Cash is king

Cash is especially valuable at a time when interest rates are soaring. The good news is that Shopify is generating plenty of cash right now and investors can expect further gains on this score ahead. Free cash flow was 16% of sales in Q3, but executives are predicting a high-teens percentage rate for the final quarter of the year.

Hitting a figure above 16% of sales would mark Shopify’s fourth consecutive quarter of improving cash flow as a percentage of sales. Coupled with the company’s soaring revenue, this success has already translated into gushing cash generation and implies better financial results ahead for 2024 and beyond.

The price is right

Unsurprisingly, many of these factors have pushed Shopify’s valuation higher in 2023. You’d have to pay 12 times annual sales to own the stock right now, up from around 10 times sales in early October.

Investors shouldn’t let that premium keep them from owning this high-performing business, though. Shopify has a good shot at expanding its market share in the growing e-commerce industry even as it converts more of that rising revenue base into profits. Paying a bit more for exposure to those positive trends makes sense for growth-focused investors.

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Demitri Kalogeropoulos has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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