Shopify (TSX:SHOP) is among the fastest-growing Canadian companies and has already generated game-changing returns for long-term shareholders. Since its IPO (initial public offering) in 2015, Shopify stock has returned 3,320% to shareholders, crushing the broader market returns by a wide margin. Despite its outsized gains, Shopify currently trades 50% below all-time highs, allowing you to buy the dip and gain exposure to a fundamentally strong company at a lower multiple.
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Is Shopify stock undervalued right now?
Valued at $138 billion by market cap, Shopify offers a platform that enables merchants to display, manage, market, and sell their products across multiple sales channels. It also allows merchants to manage inventory, process payments, and access financing.
Shopify’s sales have totalled US$7.76 billion in the last 12 months, indicating a 23% year-over-year growth. Priced at 14 times trailing sales, Shopify stock might seem expensive at first glance. However, the tech stock has focused on shoring up its profit margins amid decelerating revenue growth.
For instance, its operating margin has more than doubled from 5.9% in 2020 to 12.2% in the last 12 months. This improvement in profitability has also translated to strong cash flow growth. In the last year, Shopify’s free cash flow has totalled US$1.28 billion, up from just US$14 million in 2019.
Shopify is generating enough cash flow to reinvest in growth projects and meet its other financial obligations, such as interest payments.
The company’s growth story is far from over as Shopify continues to expand its portfolio of products and solutions. Analysts tracking the TSX stock expect its adjusted earnings to expand by 80% between 2023 and 2025. So, priced at 50 times forward earnings, Shopify’s steep valuation is supported by strong growth estimates.
Analysts, too, remain bullish and expect the stock to gain more than 30% in the next 12 months. While Shopify remains a top investment in 2024, MercadoLibre (NASDAQ:MELI) is another tech stock that should outpace the Canadian heavyweight in the long term.
The bull case for MercadoLibre stock
MercadoLibre, valued at US$105 billion by market cap, operates an online commerce platform in Latin America. Its Mercado Libre Marketplace is an automated online commerce platform that enables businesses, merchants, and individuals to list merchandise. The Mercado Pago is a fintech platform that facilitates transactions and lets users send and receive payments digitally.
In the last 10 years, the stock has returned close to 1,700% as its sales have risen from US$2.3 billion in 2019 to US$17.1 billion in the last 12 months. Its free cash flow has improved from US$314 million to US$5.62 billion in this period.
In the second quarter of 2024, MercadoLibre reported revenue of US$5.1 billion, an increase of 42% year over year. The company is positioned to benefit from multiple secular tailwinds, including rising e-commerce penetration, higher digital adoption, and a growing middle-class population.
Analysts tracking MELI stock expect adjusted earnings to expand from US$19.46 per share in 2023 to US$48 in 2025. Priced at 44 times forward earnings, MercadoLibre trades at a 5% discount to consensus price target estimates in September 2024.
