In another day of volatile trading, Shopify Inc. (TSX:SHOP) stock is down 10% after reporting earnings that beat expectations. Its sounds confusing – why would Shopify stock fall when the results were good?
Well, the answer lies largely in Shopify stock’s valuation and the expectations that are baked into it.
Shopify’s top-notch performance
The high expectations that investors hold of Shopify are understandable. This is a company that’s created an e-commerce ecosystem which has changed the playing field for entrepreneurs and even the most well-established companies. The demand for its products and solutions have been high, and this shows no signs of stopping.
Since 2020, Shopify’s revenue has increased 558% to $7 billion. In 2023, revenue increased 26% and in the fourth quarter, it increased 24%. Along with this, the company’s free cash flow generation has skyrocketed. It now stands at a very healthy 21% of revenue.
Not surprisingly, since the end of 2022, Shopify stock has increased 125%. In the last five years, it’s increased 348%. It has been a volatile ride, but well worth it for those investors that got in at the right times. Today, SHOP stock trades at more than 100 times this year’s expected earnings. It’s a pretty steep valuation that clearly makes it vulnerable to downside volatility, like we’re seeing today.
For those investors thinking that you’ve missed out on Shopify’s ride, consider this – CGI Inc. (TSX:GIB.A).
CGI is a different beast
As a well-established, global $31-billion IT and business consulting services firm, CGI is a different kind of tech stock. It has been growing and expanding through both internal growth and acquisitions for decades. This has led to the company having the reach and global presence that it has today. CGI stock’s ride has been more consistent, steadier, and less volatile.
CGI’s most recent results showed that the company continues to grow at a healthy clip. The quarter was strong on all fronts. Revenue increased 4.4% to $3.6 billion, margins were higher, and earnings per share increased more than 10%. While cash flow from operations declined versus last year, this was due to changes in working capital, so not a cause for concern. It came in at a healthy $5.7 billion.
CGI has been focused on shareholder value creation since it began way back in 1976. In fact, the company has a record on strong returns, and this quarter was no different. CGI reported a return on invested capital of a very healthy 16%. This record of strong returns and shareholder value creation makes the stock a very interesting buy.
CGI stock has a much lower valuation than SHOP stock
Lastly, and very importantly, CGI stock is more reasonably valued than Shopify. In fact, it trades at less than 20 times this year’s expected earnings. This compares to a 100 times earnings multiple for Shopify.
In this respect, CGI is actually a much better buy than Shopify. Yes, CGI is growing its EPS at a less than 10% rate, while Shopify’s EPS is growing at north of 30%. Yet, this doesn’t change the fact that Shopify stock might be overvalued in the short term at least. And this gives rise to a more volatile stock price.
Today, I favour CGI stock over Shopify.
