Shopify Inc. (TSX:SHOP) is well-known as Canada’s leader in the world of e-commerce. Grown out of the possibilities of business and entrepreneurship on the internet, Shopify has catapulted many towards a life of empowerment. In this article, I’ll explore Shopify’s business and potential, and the outlook for the SHOP stock price.
Positive cash flow signifies real progress in Shopify’s business
After many years operating as a money-losing business, Shopify is decidedly cash flow positive. This means that its free cash flow, which is defined as operating cash flow minus capital expenditures, is in the green. In fact, the latest quarter saw free cash flow of $97 million, or 6% of revenue. This compares to negative free cash flow of $87 million in the same period last year.
Interestingly, this was the third consecutive quarter of positive free cash flow. The continuous growth represents a kind of maturing of Shopify’s business. It also speaks loudly to the fact that Shopify’s business is now self-sustaining. And this changes everything in my mind. It places the company and the stock in a different (better) category in terms of its risk profile.
Along with the positive cash flow, revenue continues to be strong. In fact, revenue increased 31% to $1.7 billion versus last year. This is revenue that is increasingly recurring and diversified, both globally and in terms of customers.
Simply put, Shopify’s opportunities are growing – online, in person, globally, and in each of Shopify’s segments. As Shopify continues to make e-commerce simpler, easier, and more democratized, we can expect more of the same as this company’s expansion escalates.
Shopify embraces artificial intelligence
Artificial intelligence, or AI, is quickly penetrating all areas of our lives. It holds the promise of making things faster, better, easier, and way more efficient than ever before. Shopify is not blind to the fact that AI can help its merchants in a big way. As such, the e-commerce enabler is introducing AI-enabled features across its products and workflows. A new era of data-driven entrepreneurship and growth has begun.
For example, Shopify recently introduced Sidekick, an AI-enabled e-commerce assistant. Sidekick encapsulates all of Shopify’s analytics and data with a machine learning algorithm for merchants to use. Sidekick will analyze data and use it to help with decision-making, such as how to run promotions, store design, content, and more.
Artificial intelligence has the potential to help merchants grow bigger, better, and faster. It’s game changing, and Shopify is harnessing its power and bringing it to its merchants. These are all really good things for all parties involved.
Valuation – SHOP stock
Naturally, Shopify’s valuation is a function of the market’s expectations for the company. As far as the actual company’s expectations, they are clearly optimistic. For 2023, management expects revenue growth in the mid-20 percentage range. This compares to a 21% revenue growth rate in 2022, and much higher growth rates in prior years when growth was elevated because of the pandemic.
A slowing revenue growth rate is nothing to be alarmed about at this point. As the company’s revenue base is significantly higher, it is the natural progression of things. And this brings me to my next point, valuation.
Shopify’s (SHOP) stock price is currently trading at 10.9 times sales. This might seem a bit high, but it is nothing compared to what it was trading at only a few years ago. The stock also trades at 100 times next year’s expected earnings, also high. The company reported a net loss in its latest quarter, but if we exclude one-time items, it actually reported adjusted operating income of $146 million.
Simply put, revenue is rising and costs are falling. This is driving positive adjusted income and free cash flows. In fact, free cash flow for the upcoming quarter will be greater than that of the entire first half of the year.
The bottom line
It’s really hard to time our entry point into a volatile stock like Shopify. And while Shopify’s stock price is still not cheap, I like that the risk profile of the company has come down, and in my view, SHOP stock is likely to do well in the long-term.
