Shopify Inc (TSX:SHOP) stock is in the midst of a major growth spurt. Following major revenue deceleration in 2022, its top-line growth started climbing, reaching 23% in the first quarter. Free cash flow (a cash-only earnings metric) increased 169%. It was a pretty good performance. Not as good as the performance the company delivered in 2020 and 2021, when the COVID-19 pandemic retail closures gave it a growth spurt. But pretty good.
The question is, “Is Shopify’s growth sustainable?” We’ve already seen the company’s growth dip as low as 13%. That was following the high growth observed in 2021. This year, Shopify has a lot more competitors than it had in 2020 or 2021. So, there is a plausible case to be made that its growth will slow down. In this article, I will explore the possibility of that happening, ultimately concluding that the company’s growth will slowly decelerate over time.
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Competition rising
One reason why Shopify’s growth could slow down is because the company’s competition is rising. Over the last few years, Chinese shopping apps like TEMU, AliExpress, and Shein have grown by leaps and bounds, with Temu parent PDD Holdings’ earnings up 131% last quarter. The Chinese shopping apps operate in many of the same markets that Shopify does: Canada, the U.S., Europe.
The Chinese apps do not attract the same types of vendors that Shopify does, because their vendors are for the most part all Chinese. With that said, the Chinese apps’ vendors compete with Shopify vendors, which puts SHOP in tacit competition with the Chinese eCommerce universe. Exactly how much competition, I don’t have the data to say. But the likelihood that there’s some overlap between Shopify vendors’ customers and TEMU’s customers is extremely high.
What does this mean for Shopify’s business? Chiefly that its growth will probably never be as high as it was in the good old days of 2020 and 2021, when it was growing at 90%. Also that it will probably never be as high as it was prior to 2020, when it was growing at rates between 40% and 50% per year. That doesn’t mean the business can’t do well. However, it means that investors are likely to demand a cheaper valuation going forward.
Valuation
Shopify stock is currently priced for very high growth for a very long period of time. At today’s prices, it trades at:
- 70 times earnings.
- 11.2 times sales.
- 9.7 times book value.
- 77 times cash flow.
- 79.6 times free cash flow.
This is a pretty rich valuation – 70 times earnings and 11.2 times sales are higher multiples than those that the big U.S. tech companies trade at. Shopify has to increase its profits to be worth it at today’s prices – it isn’t worth the investment in an “earnings plateau” scenario.
So, is Shopify’s growth sustainable? I’m inclined to think that, due to competition, its growth will decelerate over time, perhaps hitting low teens in a few years. That isn’t too bad all things considered. But whether it’s enough growth to justify the high price tag is debatable.
