Shares of Shopify (TSX:SHOP) are under pressure following its underwhelming fourth-quarter (Q4) results. Shopify stock is down over 17% since its quarterly results, valuing the company at a market cap of $130 billion. The Canadian e-commerce giant has taken investors on a roller-coaster ride in the last two years, where it initially fell by more than 75% in 2022 and surged over 100% last year. Today, it trades 53% from all-time highs and might be a viable option for long-term investors.
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How did Shopify perform in Q4 of 2023?
In the December quarter, Shopify reported revenue of US$2.14 billion with adjusted earnings of US$0.34 per share. Comparatively, Wall Street forecast revenue of US$2.08 billion and earnings of US$0.31 per share in Q4.
So, why did Shopify stock fall over 10% despite its earnings beat? Well, Bay Street was left unimpressed with the company’s guidance for 2024. In Q1 of 2024, Shopify expects revenue growth to grow between 25% and 30%, which indicates a deceleration in top-line numbers.
Moreover, Shopify reported a free cash flow of US$446 million in Q4, indicating a margin of 21%. But it expects operating costs to increase this year and estimates a free cash flow margin of less than 10%, much lower than consensus estimates of 13.6%.
Is Shopify stock undervalued?
Shopify has expanded its ecosystem successfully over the years, attracting two million merchants onto its platform. The TSX tech company operates a robust platform for sellers as it recently introduced services powered by artificial intelligence. A combination of higher demand and strong customer retention and engagement rates has allowed Shopify to increase revenue at an attractive pace from US$2.92 billion in 2020 to US$7 billion in 2023.
Now, as it navigates an uncertain macro environment, Shopify aims to improve its profit margins and generate positive cash flows consistently. In Q4, Shopify reported a net income of US$657 million compared to a loss of US$623 million in the year-ago period.
Shopify is an asset-light company and is positioned to grow earnings faster than sales. Analysts tracking Shopify stock expect adjusted earnings to grow from US$0.73 per share in 2023 to US$7.6 per share in 2028, indicating an annual growth rate of almost 60%.
Today, Shopify stock is priced at 73 times forward earnings. So, if the stock is priced at 35 times forward earnings in 2028, it should trade at US$265, which is 255% higher than the current price.
What is the target price for SHOP stock?
Out of the 33 analysts covering Shopify stock, 12 recommend to “buy,” 18 recommend to “hold,” and three recommend to “sell.” The average target price for SHOP stock is US$81.44, 8.5% higher than the current price.
The upside for Shopify might not seem much today. However, investors should understand that quality growth stocks can deliver game-changing returns over time. For instance, despite the pullback in Shopify stock in the last two years, the tech heavyweight has still returned 2,550% to shareholders since its initial public offering in 2015.
Despite less-than-impressive guidance, Shopify looks like a good buy and is positioned to outpace the broader market in the upcoming decade.
