Shopify (TSX:SHOP) is a Canadian tech company that develops e-commerce software. From the time of its initial public offering to November of 2021, it was possibly Canada’s fastest company, with earnings growing at rates between 45% and 90% year over year, and a stock price that rose 6,000% in eight years. It’s been an incredible run.
Now, it’s time for me to make a confession: I was wrong about Shopify.
For most of the time I’ve covered this tech stock, I’ve ranged between skeptical and outright bearish. To be sure, I was right for a portion of the time I covered SHOP, notably in 2021 — the stock has not recovered to those highs. Not even close. Still, I continued being bearish on Shopify well into 2022, and was mistaken about that. In this article, I will explore my history of takes on Shopify and why they were mistaken.
My coverage history on Shopify
For the most part, I’ve been bearish on Shopify while covering it. The reason was never that I thought the stock was a surefire loser, I just thought that it was getting overpriced.
At one point, the stock sold for 60 times sales, while being unprofitable. I do not regret being bearish on Shopify in 2021 at all. The stock was indeed a questionable value proposition back then. Recovering to those levels will be a struggle — who knows how long that will take?
However, I was also bearish on the stock in 2020, and during the early phases of the 2022 selloff. Once Shopify had fallen below $50, I began writing takes that noted the stock had become historically cheap, though I wasn’t yet full-on recommending it. It was when the company’s revenue growth accelerated that I finally revised my opinion.
Shopify stock retakes its high growth streak
One of the reasons why I remained bearish on Shopify well into 2022 is because the company’s revenue growth decelerated dramatically. At one point that year, its revenue growth decelerated all the way down to 13%. If that sounds like decent growth to you, keep in mind that the company was trading for 20 times sales at that point. Also, its revenue-growth rate in 2020 was 86%. It was similarly high in 2021.
At the point when that earnings release — the one showing 13% growth — came out, I was bearish on SHOP because, although the stock price had already fallen, the business appeared to be deteriorating further.
Fortunately for SHOP bulls, the company got its growth back. The quarter after the one with 13% growth, revenue growth accelerated to 20%. In the most recent quarter, it was 25%. No, Shopify is not growing at its COVID-era pace or even the pre-COVID pace. It is, however, an undeniably high-growth stock again. So, its business has improved.
Shopify becomes profitable after a year of losses
In addition to regaining its top-line growth, Shopify has also regained its bottom-line profits. In its most recent quarter, the company had $276 million in free cash flow, $122 million in operating income, $718 million in net income, and $0.56 in earnings per share. If earnings keep up at the current level, then the company has a forward price-to-earnings (P/E) ratio of 44. That’s certainly a high P/E ratio, but the company is growing sales and 26%, and earnings tend to grow faster than sales when sales grow, because earnings have to “clear” expenses, resulting in a lower base period amount.
Valuation no longer as steep as it once was
Last but not least, Shopify isn’t as cheap as it once was. It used to trade at 60 times sales, now it trades at 158 times trailing earnings, and 44 times my estimate of forward earnings. Is it expensive? Yes, but not ridiculously so.
