If you bought Shopify (NYSE:SHOP) stock in November at or near its 52-week high of $1,762.92, and you’re still holding, your SHOP stock is underwater by 54%. Ouch.
Shopify’s stock hasn’t been this low since April 2020. Only a month before that, SHOP hit a low of $305.30 on March 18, 2020. Could the e-commerce platform’s share price be headed back to its March 2020 lows? Anything’s possible given current market conditions.
The bold will realize that its finances have never been sounder than they are today. As a result, aggressive investors should be considering the company’s shares at current prices.
SHOP Stock Valuation
Shopify’s stock is currently valued at 17.19x sales and 157.15x cash flow. The five-year average for both multiples is 31.7x and 1,182.4x, respectively. So either SHOP was ridiculously overvalued in past years (quite possible), or it’s reasonably priced, possibly even cheap, at current valuations.
To figure this out, let’s compare fiscal 2021 to 2020.
| 2021 | 2020 | Growth | |
| Revenue | $4.61B | $2.93B | 57.3% |
| Adjusted Operating Income | $718.0M | $437.4M | 64.2% |
| Gross Merchandise Volume | $175.4B | $119.6B | 46.7% |
| Monthly Recurring Revenue | $102.0M | $82.6M | 23.5% |
| Net Cash | $6.1B | $4.7B | 29.8% |
| Free Cash Flow | $450.0M | $380.0M | 18.4% |
Right across the board, Shopify’s business exhibited healthy growth in 2021. Its free cash flow (FCF) grew 18.4% in 2021 to $450 million. The only blemish was its FCF margin, which dropped to 9.8%, down 320 basis points from 2020.
But that’s about it.
Shopify even had $2.8 billion in other income from unrealized gains on investments in Affirm (NASDAQ:AFRM) and Global-E (NASDAQ:GLBE) in 2021. However, those stocks are down 64% and 48% year-to-date, respectively, so the $4 billion asset valuation on its balance sheet at the end of December for its equity investments will be considerably lower when it reports Q1 2022.
Ultimately, Shopify should extract value from those equity investments. But, unfortunately, it’s just going to take a little longer than initially anticipated.
The 40 analysts who cover SHOP stock give it an average Overweight rating and a median 12-month target price of $964, considerably higher than its current price. Analysts expect it to earn $3.16 a share in 2022 and $4.76 a share in 2023. Those are both down considerably from a month ago.
It’s clear that the company’s statement that its sales growth in 2022 would be less than the 57% growth achieved in 2021 altered the analyst estimates for the next two years. Given the increase in e-commerce during Covid-19, I don’t think it was realistic to think its growth levels during the pandemic were sustainable.
If I were a Shopify shareholder, I’d be happy with 25-30% annual revenue growth over the next 24 months. As the top-line numbers go higher, its adjusted operating income will likely go over $1 billion in 2022 or early in 2023.
Business remains healthy at Shopify.
Why It Won’t Go Back to $300
If you read the Q4 2021 transcript, I think it’s evident that Shopify’s business has plenty of growth ahead of it despite the expected slowdown.
For example, in 2021, almost 600 million shoppers bought something from a Shopify merchant, up more than 30% from 2020. The company finished the year with more than 14,000 merchants, up approximately 40% from a year earlier. Of those, seven Shopify merchants went public in 2021.
While the jury is still out whether “buy now, pay later” is a good thing for consumers, Shopify has undoubtedly benefited from the trend of installment buying. The company’s Shop Pay installments in Q4 2021 more than doubled YOY. Moreover, after just six months of availability, it is now the largest installments provider for U.S. Shopify merchants.
Another piece of good news is Shopify Capital, the company’s funding platform. It advanced more than $324 million to merchants in the fourth quarter, 43% higher than a year earlier. Since it launched Shopify Capital in 2016, it’s advanced more than $3 billion to its merchants.
The Bottom Line
As the company builds out the Shopify fulfillment network, the merchant satisfaction levels move higher. Happy merchants equal increased gross merchandise volume (GMV) and revenue.
Shopify remains on the right track despite the return to more typical revenue growth. However, like Amazon’s (NASDAQ:AMZN) pathway to profitability, I think the next two to three years will see the company start to throw off significant cash.
When that happens, it’s unlikely that SHOP won’t be trading over $1,000.
Shopify is an excellent long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
