The Nov. 9 headline from the Ottawa Business Journal said a lot about the future for e-commerce powerhouse Shopify (NYSE:SHOP) and SHOP stock.
Shopify takes hit as ‘stay-at-home’ stocks tumble on positive vaccine news, stated the headline.
Runway For Growth
Pfizer (NYSE:PFE) had just announced that its vaccine was 90% effective at preventing Covid-19. The idea that people could soon go back to normal in-person brick-and-mortar shopping sent Shopify’s stock down 14% on the news.
How’s it done since? As I write this, it’s trading at $24, above its Nov. 6 closing price. More importantly, for those who bought on the dip, it’s up 21% from its Nov. 10 closing price of $885.76.
The reality is that normal ho-hum day-to-day living is not going to alter the course of e-commerce penetration. Sure, it might temporarily slow the growth, but just like the electric vehicle, its tipping point is years away, providing investors with a significant runway for growth.
While you can make an argument that Shopify’s stock is expensive, I don’t think there’s an argument to be made by anyone silly enough to short its stock.
Much like Teri Hatcher’s famous quote from Seinfeld, “Shopify’s real and it’s spectacular.”
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Predicting future prices is a mug’s game. That said, I like to do it as an exercise when considering the future of a business and its business model. What does a company have to do to get to a certain price? In this case, I’m talking about Shopify and a 400% increase.
Let’s assume that SHOP stock continues to grow sales by double digits — they were up 96% in the third quarter ended Sept. 30 to $767.4 million — and it keeps on growing its bottom line — adjusted net income in the first nine months of the year was $292.5 million or 15% of revenue — the odds are good that its share price will continue to move higher.
Over the past five years through Dec.1, SHOP stock’s delivered an annualized total return of 109.8%. If its share price continues at this pace, and it’s a big if, SHOP will get to $5,000 in approximately 27 months.
Of course, we can’t have a recession between now and then for this to come to fruition.
The Wall Street Journal reported on Nov. 25 that the jobless claims for the previous week were 778,000, the second consecutive week with an increase. More importantly, despite the drop from almost seven million in March, the weekly number was higher than at any time between 1967 when they started tracking jobless claims and the start of the pandemic.
In other words, we are not out of the woods by a longshot.
So, if I’m handicapping Shopify stock, I’m far less concerned about a dropoff in sales post-vaccine than I am about a debilitating recession that prevents consumers from buying things–online or off.
That’s the fly in the ointment that prevents SHOP from getting to $5,000 in less than three years.
How About 5 Years?
To get to $5,000, based on today’s starting point of $1,000, it needs to generate an annualized total return of 38%. That almost seems downright mediocre compared to its returns since going public in May 2015.
At that pace, I think we could still have a recession, and Shopify would manage to hit the target.
At the moment, Shopify has a trailing 12-month free cash flow of $180 million and an enterprise value of $124.6 billion, for an FCF yield of 0.14%. Its free cash flow for the TTM is 7.3% of its $2.46 billion in sales, about half the percentage achieved in the first nine months of fiscal 2020.
In 2019, Shopify had sales of $1.58 billion. For the first nine months of 2020, they grew 81% year-over-year to $1.95 billion, $370 million higher than 2019 in its entirety. Assuming revenues grow by 80% for all of 2020 — Shopify reported record-setting Black Friday sales — it ought to finish the year with $2.84 billion in sales.
Assuming free cash flow in 2020 is 10% of sales, it will finish the year at $340 million. Its enterprise is currently 692 times free cash flow. Based on the same multiple, its enterprise value would be $235.2 billion, 89% higher than its current valuation.
Bottom Line on SHOP Stock
Does this mean SHOP will jump by 89% by the end of the year? Sadly, no.
However, it ought to give you enough courage to buy SHOP stock for the long haul, despite being up 169% YTD.
Long story short, don’t let the vaccines shake you out of your position or stop you from jumping on the bandwagon.
Long term, Shopify’s a winner.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.