Assessing Shopify’s Worth After a 8.5% Drop Amid Volatile Tech Headlines

Thinking about what to do with your Shopify stock? You are not alone. Anyone who has held SHOP over the last few years knows the dizzying highs and nail-biting drops that can come with riding this e-commerce giant. Shopify has posted a massive 420.6% gain over three years, and while it is up 77.1% in just the past year, the last week saw shares slide 8.5%. This serves as a jarring reminder that growth stocks can be volatile even when the long-term trend is strong. For those who zoom out, Shopify’s return of 30.4% year-to-date still stacks up well against the broader tech sector, but these swings can leave investors questioning whether it is the right time to buy, hold, or cash out.

Recent headlines do not appear to be the direct cause of Shopify’s latest movements. While other names in tech are making waves with buyout rumors (like the SentinelOne drama) and disruptive retail updates (see OpenAI eyeing a bigger e-commerce cut), Shopify’s story right now is less about flashy news and more about the perennial question: what is it really worth after such a run-up?

Here is where things get interesting. By the numbers, Shopify’s current value score sits at 0. That means, out of six recognized valuation checks, the company is not undervalued in a single one. This may raise eyebrows for those expecting a bargain or deep-value play, but valuations tell only part of the story. Let’s dig into how analysts approach Shopify’s valuation using different models, and stick around, because there may be an even sharper way to gauge what Shopify is really worth.

Shopify scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Shopify Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by projecting its future cash flows and discounting them back to today using a required rate of return. For Shopify, this means analysts look at what the business will actually generate in terms of cash and then assess what those future dollars are worth in present terms.

Currently, Shopify’s Free Cash Flow (FCF) over the last twelve months stands at $1.80 Billion. Analysts forecast robust growth over the next few years, projecting FCF to rise to approximately $5.34 Billion by the end of 2029. While only the next five years are based on analyst estimates, Simply Wall St extends this trajectory with its own longer-term projections, reflecting an expectation of continued momentum well into the next decade.

After crunching all the numbers, this DCF analysis places Shopify’s fair value at $94.79 per share. However, this is about 48.0% below its current market price, implying the stock is trading significantly above what its future cash flows would justify today. This presents Shopify as meaningfully overvalued by this approach, at least for investors who place the most weight on fundamentals and future cash generation.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Shopify.

Our Discounted Cash Flow (DCF) analysis suggests Shopify may be overvalued by 48.0%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Shopify Price vs Earnings

The price-to-earnings (PE) ratio is one of the most widely used valuation metrics for profitable, growth-oriented companies like Shopify. It reflects how much investors are willing to pay for each dollar of current earnings, making it especially relevant now that Shopify is generating solid profits. High growth potential and lower perceived risk tend to support a higher PE, while more mature or riskier companies warrant a more modest multiple.

Currently, Shopify trades at a lofty 77.73x PE. This towers above the IT industry average of 31.30x, as well as its peer group average of 53.13x. While such a premium can sometimes be justified by exceptional growth or other advantages, it still prompts the question of whether Shopify’s valuation is actually reasonable given all its characteristics.

That is where the Fair Ratio comes into play, as developed by Simply Wall St. This proprietary metric aims to capture not just the simple averages but also Shopify’s unique situation, factoring in its specific growth prospects, risk profile, profit margins, scale, and industry setting. For Shopify, the Fair Ratio is estimated at 42.71x, notably below where the shares currently trade.

Comparing Shopify’s 77.73x to the Fair Ratio of 42.71x, it appears the company is valued much higher than what would be justified by even an optimistic lens. This suggests Shopify stock is overvalued based on the PE multiple, echoing the result from the DCF approach.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Shopify Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is a clear statement of your investment story for a company. It describes what you believe will drive its future, how that shapes things like revenue and profit growth, and what fair value you assign based on those assumptions. Narratives connect the dots from company story to financial forecasts and all the way to a fair value, making it much easier to see whether the price today lines up with your expectations.

On Simply Wall St’s Community page, Narratives are an accessible tool used by millions of investors. They help you clarify and communicate your point of view and instantly see if you think Shopify is under- or over-valued by comparing your Narrative-based Fair Value to the current share price. As news and earnings roll in, the platform lets you update your Narrative dynamically so your analysis always stays relevant.

For example, different investors reviewing Shopify might come to dramatically different conclusions: the most bullish see a fair price as high as $200 if international expansion and AI propel growth, while the most cautious set it closer to $114, reflecting worries about competition or margin pressures. Narratives help you make your decision based on your views, not just generic numbers.

Do you think there's more to the story for Shopify? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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