Should You Reconsider Shopify After Its 12% Surge and Enterprise Expansion News?

• Have you ever wondered if Shopify stock is really a bargain at today’s prices, or if you might be arriving a bit late to the party? Let’s break down what makes this company’s valuation so intriguing right now.
• Shopify’s share price has taken investors on a wild ride lately. It surged 12% in the last week, is still down 9% over the past month, and is up an impressive 46.3% year-to-date.
• Recent headlines highlight Shopify’s ongoing expansion into enterprise ecommerce as well as its partnerships with global payment platforms. These moves have kept the company in the spotlight as online shopping rebounds and digital competition intensifies. As a result, they have contributed to some of the recent price volatility.
• If you are looking at Shopify’s valuation score, it currently stands at 0 out of 6. This means it is not considered undervalued according to any of our basic checks. Next, we will examine exactly how these valuations are determined using different methods, and stay tuned because there is an even more insightful way to view valuation by the end of the article.

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 uses future cash flow projections and discounts them back to today’s value, aiming to estimate what a company is really worth on its ability to generate cash. For Shopify, the model relies on its most recent Free Cash Flow of $1.89 Billion USD as a starting point.

According to analyst estimates and Simply Wall St’s projections, Shopify’s annual Free Cash Flow is expected to grow rapidly in coming years, reaching a projected $5.56 Billion USD by 2029. While analysts currently forecast cash flows up to five years ahead, subsequent years are extrapolated based on recent company and industry trends.

When all these projected cash flows are summed up and discounted back to today’s dollars with a standard equity model, Shopify’s estimated intrinsic value lands at $98.84 per share. Comparing this to the current share price, Shopify appears to be trading at a 59.2% premium, meaning the market price is much higher than what this DCF model suggests is reasonable.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Shopify may be overvalued by 59.2%. Discover 933 undervalued stocks or create your own screener to find better value opportunities.

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

Approach 2: Shopify Price vs Earnings (PE)

For companies that are consistently profitable, the Price-to-Earnings (PE) ratio is a well-recognized method to assess whether a stock is trading at a reasonable price relative to its earnings. The PE ratio boils a company's value down to what investors are willing to pay for each dollar of profit it earns, making it especially relevant when you can trust that earnings are recurring and sustainable, such as with Shopify.

Growth prospects and perceived risks play a significant role in determining a "normal" or "fair" PE ratio for any given company. High-growth businesses with relatively predictable earnings are typically awarded higher PE multiples, while industries facing uncertainty or slow growth tend to trade at lower ratios.

Currently, Shopify is valued at a lofty 115.0x PE ratio. For perspective, the IT industry average is just 27.9x, and even peers in Shopify's space average about 40.2x. These benchmarks help set the scene but may not capture all of Shopify’s context.

This is where Simply Wall St’s proprietary Fair Ratio becomes invaluable. For Shopify, the Fair Ratio is calculated at 52.4x, factoring in its strong growth, solid margins, sector, risk profile, and market capitalization. Unlike broad industry comparisons, this Fair Ratio provides a more tailored benchmark that adjusts for the company’s unique strengths and circumstances.

With Shopify’s actual PE significantly higher than its Fair Ratio, the stock appears clearly overvalued according to this metric.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1437 companies where insiders are betting big on explosive growth.

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 concept that makes investing more personal and insightful. A Narrative is essentially your story about a company, built from your own assumptions about its future revenue, earnings, margins, and ultimately, its fair value. Narratives bridge the gap between a company’s business story and a transparent financial forecast, translating your outlook into a concrete estimate of what the stock is really worth.

Simply Wall St’s Narratives, available right on the Community page and used by millions of investors, are designed to be both easy and accessible. By creating or following Narratives, you can visualize how different assumptions impact Shopify’s fair value, and quickly see how your unique perspective stacks up against the current share price. This can help you decide when to buy or sell with greater confidence.

What makes Narratives truly powerful is that they update dynamically. Whenever news breaks or earnings are released, the underlying numbers and your fair value update instantly, giving you a living snapshot of your investment thesis. For example, one investor might have a bullish Narrative projecting strong international sales and assign Shopify a fair value of $200 per share. Another investor, concerned about rising costs and competitive risks, may set their fair value at just $114 per share.

Do you think there's more to the story for Shopify? Head over to our Community to see what others are saying!

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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