Shopify (TSX:SHOP) is one of Canada’s best-performing tech stocks. If you’d bought the stock at its initial public offering (IPO) date and held to today, you’d be sitting on a 2,589% capital gain today. This means that if you invested $10,000 in the stock in its IPO, you’d have $2,590,000 today — not a bad result at all!
With that being said, it’s never prudent to buy a stock just because its price went up in the past. Those investors who chased Shopify’s momentum in 2021 were taught a harsh lesson, as their shares began crashing in November of that year. Today, the shares remain down 55%. The company has regained much of its mojo, but it remains a loser for those who bought exclusively in 2021. The question is, can SHOP stock turn it around and regain all the ground it lost in 2022’s technology bear market?
In this article, I will attempt to answer that question.
Strong growth
One thing that Shopify still has going for it, even after its 55% selloff, is growth. Growth in the underlying business, I mean — not necessarily growth in the stock price over every conceivable timeframe. Although SHOP stock is down over the November 2021 to November 2023 timeframe, the business itself is doing better than ever. As proof of that, we can look at the company’s most recent quarterly earnings release.
In the third quarter, Shopify delivered the following:
- $1.71 billion in revenue, up 26%
- $56.2 billion in gross merchandise volume, up 22%
- $901 million in gross profit, up 91%
- $122 million in operating income and a 7% operating margin
- $276 million in free cash flow, up from a negative sum in the prior year quarter
- A 16% free cash flow margin
Overall, it was a strong quarter. In the third quarter (Q3), Shopify was profitable and had high double-digit revenue growth. The results were far in excess of what analysts expected.
Expensive valuation
As we saw above, Shopify is a profitable, high-growth enterprise. If the stock price weren’t a concern, it would be an appealing investment. However, Shopify’s stock price is something of a concern: it’s rather high. SHOP is currently trading at an expensive valuation, trading at the following multiples:
- 150 times earnings
- 13.3 times sales
- 10.7 times book value
- 150 times operating cash flow
These multiples are rather steep. However, SHOP stock is actually quite a bit cheaper than it was in the past. For much of its history, SHOP traded at 60 times sales and had no price-to-earnings (P/E) ratio, because it wasn’t profitable. Today’s valuation is much more modest. There are large, mature tech companies that trade at multiples similar to Shopify. Apple has a higher price-to-book ratio than SHOP does, and Amazon has a 75 P/E ratio. Shopify’s multiples are high but are no longer stratospheric compared to NASDAQ-listed tech stocks. So, the company is growing into its valuation.
Foolish takeaway
Shopify has given investors a wild ride over the years. From its 5,000% post-IPO run up to its $213 peak to its later 55% selloff, it has been extremely volatile. Nevertheless, the stock remains a long-term winner, up 2,849% from its IPO. I’d say it could make some gains from its current level, as it is no longer as pricey as it once was.
