The company is consistently demonstrating strong growth, though that doesn’t automatically mean the stock is a recommended purchase.
Shopify stock has experienced significant volatility over recent years. Following the pandemic’s peak, shares increased by over 400% due to a surge in demand for e-commerce software and payment solutions. Subsequently, the stock saw a steep decrease, nearing a 90% decline as the e-commerce boom settled. Currently, the stock has risen by 55% over the past 12 months but remains well below its 2021 peak.
Growth stocks like Shopify are known for their volatility. However, an analysis of the company’s financials shows considerable improvements in both growth and profitability. This raises the question of whether Shopify stock is a good buy at under $100 a share.
During the COVID-19 pandemic, Shopify pursued ambitious strategies, including competing with Amazon through a logistics network, exploring cryptocurrencies, and acquiring a robotics company. Many of these initiatives have since been terminated, and the logistics operation has been sold. The company has also streamlined its workforce, reducing staff by 20%. These extensive plans previously caused Shopify to lose focus, resulting in a $1 billion operating loss and negative free cash flow at the beginning of 2023.
Shopify is now refocusing on its core product offerings: a suite of e-commerce software tools for building and managing online experiences and a suite of payment tools for processing payments both online and in person. These two product lines are the primary drivers of Shopify’s $7.7 billion in annual revenue.
After adjusting for the logistics business sale, Shopify reported a 25% year-over-year revenue increase last quarter, reaching $2 billion. Notably, it achieved a 31% revenue growth in the same quarter last year, suggesting it is gaining market share within the e-commerce sector. The company is also applying pricing strategies to its subscription services, maintaining low customer churn.
Shopify is exhibiting improved efficiency in its operations, with a free-cash-flow margin of 16% last quarter, up from 6% in the previous year’s quarter. The operating margin stands at 11.8%, factoring in stock-based compensation as an expense. Management anticipates continued rapid growth in 2024, projecting revenue increases in the mid-20% range alongside double-digit free-cash-flow margins. Long term, the company aims to sustain its growth by acquiring market share in the e-commerce sector, which is expected to continue gaining over offline retail for the remainder of the decade.
With the stock’s valuation in focus, despite being 50% below its peak, Shopify’s market capitalization remains significant at $100 billion, with a current stock price of $80. This valuation is over 10 times its trailing-12-month sales. Financial modeling suggests that with an assumed yearly revenue growth of 20% over the next five years, Shopify’s revenue could rise from $7.7 billion to approximately $19 billion. This, along with an increased operating margin from 11.8% to 20%, implies $3.8 billion in earnings in five years.
Compared to the current market capitalization, this results in a five-year forward price-to-earnings ratio estimate of 26, aligning with the S&P 500 index today. Thus, the stock is already priced to reflect five years of anticipated annual revenue growth and margin expansion. This insight suggests that Shopify stock, even below $100, may not present a compelling purchase opportunity at its current valuation.
