Shopify Stock Looks Pricey and Here’s Why That May Actually Make Sense

Shopify Inc (TSX:SHOP) stock has a nosebleed valuation, but it may be worth it.

| More on:
Business man on stock market financial trade indicator background.

Image source: Getty Images

You probably don’t need me to tell you that Shopify (TSX:SHOP) is an expensive stock. Trading at a $111 billion market cap, it’s one of the most richly valued companies in Canada. In the past, it was even the most valuable Canadian company as measured by the combined value of all its shares!

At today’s prices, SHOP trades at 202 times forward earnings, 13.8 times sales, and 9.7 times book value. That’s a pretty rich valuation, even for a technology stock. For comparison, the NASDAQ-100 – the world’s biggest index of tech stocks – trades at a 32 market P/E ratio.

The fact that Shopify trades at high multiples has led many to call the stock overvalued. Indeed, if growth weren’t part of the picture, it would be overvalued. Fortunately, Shopify has above average growth – even for its high-growth sector – therefore, its high multiples don’t tell the whole story. In this article, I’ll explain why Shopify stock’s rich valuation might make sense, while also highlighting some risks facing investors.

Shopify’s growth is strong

The main reason why Shopify isn’t as expensive as it looks is because it has high growth. If a stock trades at 10 times last year’s earnings, but you know that earnings will double next year, then you should conclude that it really trades at 5 times earnings. Now, investors sometimes get carried away with “forward earnings” – such earnings are just estimates – but Shopify’s growth has been remarkably strong for its entire history. In its most recent quarter, SHOP delivered:

  • $1.5 billion in revenue, up 25%.
  • $49.6 billion in gross merchandise volume, up 15%.
  • $1.1 billion in merchant solutions revenue, up 31%.
  • $717 million in gross profit, up 12%.
  • $86 million in free cash flow, compared with negative free cash flow in the same quarter a year before.
  • $0.05 in diluted EPS, up from a loss.

Overall, it was pretty impressive growth. The growth rates were down from the 86% observed in 2020 (i.e., the revenue growth decelerated), but the growth was still such that the company was catching up with its stock price at a rapid pace. Potentially, it will not look so expensive at some point in the future.

The company is arguably back to being profitable

If you looked at the earnings just reviewed, you may have caught something:

Shopify is arguably back to being profitable.

In the most recent quarter, it had positive free cash flow and net income. The e-commerce platform was undeniably profitable for the quarter. It was not profitable in the entire trailing 12-month period, but it may claim that distinction after a few more quarterly releases roll in.

The sky is the limit

A final reason why Shopify’s stock price might not be crazy is because the company’s total addressable market is virtually unlimited. E-commerce is an industry that touches every corner of the globe, and Shopify powers some of the world’s most popular e-commerce sites. As long as the company can keep signing up large vendors, the sky is truly the limit. So, maybe the 202 forward P/E ratio isn’t that nutty after all.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

More on Tech Stocks

falling red arrow and lifting
Tech Stocks

Is Shopify a Buy, Sell, or Hold?

Shopify (TSX:SHOP) stock has been pulling back of late, opening up a window for dip buyers.

Read more »

Different industries to invest in
Tech Stocks

2 No-Brainer Growth Stocks to Buy Now With $2,000 and Hold Long Term

These growth stocks have already proven their worth this year, but are solid investments for long-term holders as well.

Read more »

woman data analyze
Tech Stocks

1 Stock That’s Just as Hot as Nvidia (Without All the Hype)

Nvidia (NASDAQ:NVDA) stock has surged in share price, but so has this stock, with a far lower share price to…

Read more »

Index funds
Tech Stocks

Constellation Software Stock: Buy, Sell, or Hold?

Unveiling the Code: Should you Buy, Hold, or Sell Constellation Software (TSX:CSU) stock at current levels?

Read more »

A plant grows from coins.
Tech Stocks

Got $5,000? These Are 2 of the Best Growth Stocks to Buy Right Now

Growth investors should have these two tech stocks high up on their watch lists.

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Tech Stocks

Well Health Stock Is Down 58% From its Highs – Time to Buy?

Well Health stock has been hit, but the company remains on a path of record-breaking revenues as it approaches positive…

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

TFSA: The Most Expensive Stock in Canada Is a Top Buy Today

CSU stock (TSX:CSU) may be the priciest stock on the TSX today, but there is a very good reason for…

Read more »

TFSA and coins
Dividend Stocks

TFSA: Invest $15,000 in CSU Stock and Get $4,694 in Passive Income

CSU stock (TSX:CSU) has surged in the last year, yet even if growth slows by half, you could create immense…

Read more »