Why Shopify Inc. is a High Growth Stock, but Possibly Overvalued

JackJackson
2022-03-25

Shopify Inc. $Shopify Inc(SHOP)$ is seeing increased volatility after a four-month downtrend. Investors are wondering if the price has found a grip, or if the stock is still losing ground, especially with today's price action prompting investors to re-evaluate their thesis. In this article, we will re-cap the key fundamentals and estimate if the stock is trading around value.

Shopify provides a platform for merchants to create an online presence and distribute their products. Its main competitor is Amazon $Amazon.com(AMZN)$ , with one of the key distinguishing features being that Shopify caters to merchants while Amazon competes with them and is generally more tilted on the side of the consumer. Shopify aims to capture both big and small merchants, and enable them to reach as many clients as possible.

Shopify has about 1.5 million merchants, and an estimated market opportunity of $20t - Global, ex. China. The company is estimated to help merchants capture 1% of that value, which will bring its gross merchandise value up to 200b. The company's take rate is currently 2.6% which is reflected in the US$4.612b revenues - Shopify is seeking to expand this as it offers more services.

Shopify's Fundamentals

Shopify is estimated to increase revenues to US$10.5b by the end of 2025, which would imply a gross merchandise value of around US$400b, a high growth of about 230%+. Conversely, this would represent some 2% of the total addressable market we mentioned above. While 2% may not seem much, reaching US$10b revenues is no easy feat, and analysts run the risk of assuming high growth will continue long in the future.

There is also a substantial difference between profits and cash flows, with the latter being important for investors. In the last 12 months, Shopify made US$2.9b in net profit, but only US$453.6b in free cash flows. When estimating which number of the two will converge, in theory we assume that profit converges to cash flows, which is also what analysts are projecting in the chart above.

Qualitatively, we must also consider that 2020 and 2021 were unusual years, and consumers did increase their online spending, but also started new businesses - many of which ended up on Shopify. We need to account for the possibility that this enthusiasm for starting new businesses will drop, and part of the started businesses on the platform will fail as people return to the workforce. Hopefully, Shopify can use the boost in earnings to make efficient capital investments that will allow the platform to offset this decline and even drive further growth. None of this is a given, and that is why sometimes we need to wait for results before assigning optimistic valuations.

Source:SIMPLYWALLST

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Comments

  • YSLiu
    2022-03-25
    YSLiu
    just buy both Amazon n Shopify
  • jethro
    2022-03-28
    jethro
    thanks for the share
  • CHGS
    2022-03-28
    CHGS
    🙂
  • ysawm
    2022-03-28
    ysawm
    yes
  • XiaoV
    2022-03-28
    XiaoV
    👍🏻
  • coldeye
    2022-03-28
    coldeye
    👍
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