Valued at a market cap of $217 billion, Shopify (TSX:SHOP) is among the largest companies in Canada. The tech giant provides e-commerce solutions to small, medium, and large enterprises. Like several other technology companies, Shopify gained massive traction during the COVID-19 pandemic and traded at all-time highs in late 2021.
However, in the last three years, it has wrestled with headwinds such as slowing growth, inflation, and rising interest rates. In fact, during the bear market of 2022, SHOP stock was trading almost 85% below record levels. While Shopify has recovered, it still trades 22% below all-time highs. So, let’s see if the TSX tech stock can recover in 2025 and trade at a fresh record high.
The bull case of investing in Shopify stock
Shopify continues to demonstrate strong growth in the third quarter (Q3) of 2024, with revenue up 26% year over year and GMV (gross merchandise value) increasing by 24%. It was the fifth consecutive quarter where GMV growth exceeded 20%. The e-commerce behemoth also showed impressive profitability metrics, with operating income more than doubling from last year and free cash flow (FCF) margin expanding to 19%.
Shopify’s results in Q3 were driven by factors such as international expansion, particularly in Europe, where GMV rose over 35%.
The company is making significant inroads in the enterprise segment, onboarding several global brands, including Reebok, Off-White, and Victoria’s Secret. Its Point of Sale (POS) solution saw continued adoption among large multi-location merchants, with a 50% increase in locations year-over-year. Major retailers like Laura, a Canadian women’s fashion retailer, migrated over 130 stores to Shopify’s POS system in one of their largest migrations to date.
Shopify’s B2B segment showed exceptional growth, with GMV increasing by 145% year over year, maintaining five consecutive quarters of triple-digit growth. September marked the largest single month ever for B2B GMV, with expansion into new sectors, including industrial, hardware, and automotive vehicles.
A strong focus on innovation
On the product front, Shopify continues to innovate with artificial intelligence (AI)-powered features and automation tools. It introduced enhancements to Shopify Flow, a workflow automation app, and improved the Shopify Inbox with AI-suggested replies. The tech heavyweight also expanded its financial services suite, Shopify Finance, which includes multiple products.
Shopify’s payment solutions continue to gain traction, with Shopify Payments penetration reaching 62% and Shop Pay facilitating US$17 billion in GMV, up 42% year over year. Notably, Shopify strengthened its leadership team by adding Mikhail Parakhin as chief technology officer, who brings extensive AI experience from his tenure at Microsoft, where he led the development of Copilot.
The company also announced strategic partnerships, including becoming Roblox’s first commerce integration partner and expanding its relationship with PayPal.
Is Shopify stock undervalued?
Looking ahead to Q4, Shopify expects revenue to grow at a mid- to high 20% rate, with operating expenses expected to be 32% to 33% of revenues. It plans to maintain its current FCF margin profile while investing in growth initiatives.
Chief Financial Officer Jeff Hoffmeister highlighted Shopify’s transformation from a negative 3% FCF margin in 2022 to be on track for high teens in 2024, demonstrating an ability to balance growth with profitability. Shopify is focused on capturing an increasing share of the expanding e-commerce market while maintaining its position as the go-to platform for businesses of all sizes.
Shopify is forecast to expand its sales from US$7 billion in 2023 to US$12.5 billion in 2026. Comparatively, FCF is forecast to grow from US$905 million to US$2.6 billion in this period. So, SHOP stock is priced at 58 times forward FCF, which is quite expensive. Given analyst consensus estimates, the tech stock trades at a discount of 4% right now.
