The e-commerce market in the U.S. is valued at US$1.2 trillion, accounting for 16% of the country’s total retail sales. At the global level, the e-commerce market is forecast at US$5 trillion. Despite its massive size, digital sales continue to grow in the U.S. and several other international markets, making companies such as Shopify (TSX:SHOP) top investment choices right now.
Shares of Shopify went public in May 2015 and have since returned close to 5,000% to shareholders. The Canadian tech stock touched all-time highs during the last bull run in 2021 and currently trades 30% below all-time highs. So, let’s see if SHOP is a good stock to own at the current valuation.
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The bull case for Shopify stock
Shopify is a Canadian e-commerce platform that provides comprehensive e-commerce solutions globally. It offers tools for merchants to sell through multiple channels, including websites, mobile apps, social media, and physical locations. The Shopify platform handles product management, inventory, orders, payments, shipping, payment processing, and more.
Shopify is the second-largest e-commerce company in the U.S. after Amazon, providing e-commerce infrastructure to over two million merchants globally. Rather than competing directly in retail, Shopify offers a portfolio of tools for running online businesses, which ranges from website building to payment processing.
Shopify’s strategy of “arming the rebels” has driven impressive growth. The company’s sales have risen from US$105 million in 2014 to US$7.06 billion in 2023. In the last 12 months, its revenue has grown by 23.5% year over year to US$8.21 billion.
Like other tech companies, Shopify is asset-light and benefits from a high operating leverage. Moreover, focusing on cost efficiencies has allowed the company to increase its operating margin to 13.1% in the last four quarters, up from 5.9% in 2020. In the third quarter (Q3) of 2024, Shopify grew its sales by 26% year over year to US$2.16 billion, while operating income almost doubled to US$283 million.
What is the target price for SHOP stock?
Shopify’s growth story is far from over, given it is part of an expanding addressable market. It is the fourth-largest e-commerce platform in the world and continues to expand omnichannel retail solutions by integrating online and offline commerce. The merchant services business, which accounts for 72% of sales, is a key driver of top-line as it offers add-ons such as payment processing and marketing tools, resulting in higher engagement rates.
Shopify sold its fulfillment network to Flexport and is focused on its core software business, resulting in profit margin expansion. Analysts tracking Shopify stock expect sales to rise from US$8.8 billion in 2024 to US$12.5 billion in 2026. Comparatively, adjusted earnings are forecast to expand from US$1.26 per share in 2024 to US$2 per share in 2026. Notably, free cash flow growth is higher as it is projected to touch US$2.5 billion in 2026, up from US$1.54 billion in 2024.
Priced at 11.1 times forward sales, 53.5 times forward earnings, and 42.8 times forward FCF, Shopify stock trades at a steep valuation. However, Wall Street remains bullish and expects the TSX tech stock to gain over 12% in 2025, given consensus price target estimates.
The Foolish takeaway
Looking ahead, Shopify is well-positioned to benefit from the projected 19% compounded annual growth rate in e-commerce through 2030. While SHOP stock trades at high multiples, it is well below historical peaks, suggesting room for growth.
The company’s revenue growth has moderated from pandemic highs but remains strong at 23%, with analysts expecting similar growth in 2025.
