Is Shopify Stock a Buy, Sell, or Hold For 2025?

Shopify continues to post strong revenue and earnings growth. Is that enough to justify its rich valuation?

Karen Thomas, MSc, CFA ❯

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published October 8, 2024 4:40 pm EDT

Today, Shopify Inc. (TSX:SHOP) remains 50% lower than its 2021 highs. Is this a golden opportunity to buy? What’s in store for Shopify’s stock price in 2025?

Let’s take a look at a few relevant details.

Shopify stock: Valuation

Shopify stock has always been richly valued. This valuation reflects the strong growth achieved, as well as unabashed optimism toward the company. Is this valuation reasonable? Is it deserved?

Shopify stock trades at 73 times this year’s expected earnings (52% growth rate). Also, it trades at 59 times expected 2025 earnings (22.5% growth rate).

Clearly, there’s a lot of positive assumptions that are being baked into the stock’s valuation. While the bigger the company gets and the more difficult it will be to keep these strong growth rates up, things are still going strong. In the company’s latest quarter (Q2/24), revenue increased 25% (excluding the logistics business). Furthermore, gross profit grew faster than revenue and the company’s free cash flow margin more than doubled to 16%.

Given the strong results the company continues to post, I’m not totally surprised with its valuation. But I think we should recognize that the valuation is high. Based on this alone, I would wait for weakness to buy the stock.

Growth

There’s no denying that the consistent and strong growth at Shopify is impressive. This is reflected in the 25% revenue growth rate in Q2 2024. In each of the last five quarters, the company achieved 25% or greater revenue growth and positive free cash flow. In the latest quarter, the company’s free cash flow margin (free cash flow divided by revenue) more than doubled to 16%.

Simply put, the business is strong. This has allowed the company to deliver growth, raise free cash flow margins, and make investments to grow the business.

This strength is also reflected in the company’s outlook. For example, management expects that the next quarter will see revenue growth in the low to mid-20% range, with stronger gross margins and free cash flow margins. Expect double-digit free cash flow margins for the remainder of the year.

Future growth at Shopify

The company has continued to expand to new geographic markets and introduce new ways to make the business owner’s experience better and easier. For example, Shopify introduced Sidekick, an AI enabled e-commerce assistant. Sidekick encapsulates all of Shopify’s analytics and data with a machine learning algorithm for merchants to use. Sidekick will analyze data and use it to help with decision-making, such as how to run promotions, store design, content, and analysis.

The bottom line

Good things are in store as Shopify continues to add capabilities and expand geographically. The company has proven that the business has a lot of potential, both from a top-line and bottom-line perspective.

But back to my initial question – what should we do with Shopify stock in 2025? Well, my answer is quite simple. If you own it, I would recommend holding it. But I would consider taking some profits if it gets much more expensive. Finally, if it gets much cheaper, I would take that opportunity to buy.

2025 is shaping up to be a great year for the company. Shopify stock, on the other hand, looks like it might be pricing in a lot of the good news and expectation. I would, therefore, exercise caution.