Stock Analysis & Ideas

Shopify: Valuation Is Finally Fair

Shopify (SHOP) has proven itself as the leader in supplying trusted tools to start, develop, market, and operate a retail business of any size online.

Shopify’s goal revolves around enriching the experience of online shopping for both merchants and customers with a platform and services that have been developed with reliability and innovation in mind.

Nowadays, it is vital for businesses to have a concrete online presence when it comes to shopping, and Shopify’s distinctive tools, including Shopify Capital, Shopify Pay, and Shopify Shipping, have been critical to the success of many of its users.

The COVID-19 pandemic accelerated the overall trend of increasing business activity online, as it significantly shifted a great chunk of sales volumes from previously physical locations to online. Consequently, Shopify was one of the major beneficiaries of the pandemic.

That said, investors had substantially overvalued shares over the past couple of years, which at one point were trading at exuberant multiples reaching 50x the company’s forward sales or more.

Consequently, following the tech sector’s violent correction year-to-date, Shopify experienced one of the most forceful valuation compressions, seeing its shares lose as much as two-thirds of their value.

In my view, following the company’s latest robust quarterly report and the stock’s considerable decline, Shopify appears quite attractively priced. I am bullish on the stock.

Q4 Results – Continous Growth

In its Q4 results, Shopify reported revenues of $1.38 billion, beating analyst estimates by $40 million and recording year-over-year growth of 41%. Subscription solutions revenues also rose 26%, while merchant solution revenues came in 47% higher versus the comparable period last year.

Shopify’s revenues had increased by over 85% in FY 2020, boosted by the tailwinds of the pandemic. Thus, seeing the company closing FY 2021 with revenues of $4.61 billion, a 57% year-over-year growth on top of the previous year’s “inflated” results, is utterly impressive.

Adjusted EPS came in at $1.36 versus $1.58 a year ago, but net profits are not the primary concern at this point as the company records substantial stock-based compensation levels and is also reinvesting much of its operating cash flows back into the business.

It’s noteworthy that Shopify’s merchants are currently being impacted by the ongoing supply chain bottlenecks, including growing logistics and labor costs. Thus, it’s likely to see Shopify’s expansion even accelerate once the ongoing logistics hurdles ease.

Wall Street’s Take

Turning to Wall Street, Shopify has a Moderate Buy consensus rating, based on 13 Buys and 14 Holds assigned in the past three months. At $988.63, the average Shopify price target implies 43.1% upside potential.

Valuation & Conclulsion

Considering it would not be entirely indicative to value Shopify based on its current profitability, we are peeking at its expected revenue growth and multiple on this year’s projected sales.

The stock is currently trading at 16.2 times this year’s projected sales, which is a far more reasonable multiple than the one attached to the stock over the past couple of years.

Analysts anticipate the company to grow its revenues by a CAGR larger than 30% in the medium term. Considering that the company’s gross margins are quite juicy, which should translate to robust net income once the company matures, I believe the stock’s valuation is rather fair. Thus, I remain bullish on Shopify.

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