Shopify: A High-Growth Leader with a Pricey Valuation

Yahoo

03-03-2025

Over the past few quarters, Shopify's stock has been extremely volatile, with prices swinging sharply. Despite these fluctuations, the company has recently posted impressive gains that reinforce its place in a long-term portfolio. Even though inflation worriesfueled by concerns over tariff policies under the Trump administrationhave rattled the markets, Shopify has shown remarkable resilience. Its recovery from the 2022 selloff has been nothing short of extraordinary, with shares rebounding nearly fourfold from their October 2022 lows. After reporting Q4 results, the stock wavered between gains and losses, despite clear signs of accelerating growth. I find the market's tepid reaction to these earnings perplexing, as Shopify has consistently delivered strong performance during tough economic times, suggesting that its growth potential could be even higher once the broader economy picks up.
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While the stock trades at a premiumwhich might appeal to aggressive growth investors due to its ability to capture market share in a rapidly expanding industrythe upside appears limited unless it surpasses the already optimistic consensus estimates. Given these ambitious growth expectations and stretched valuation assumptions, I believe the potential returns don't match my risk appetite. For now, I recommend holding your current position and waiting for a market pullback to build a larger stake, while being cautious not to get overly greedy on Shopify at its current high valuation.
Shopify has long been the go-to platform for SMBs, but it's now making a deliberate push into the enterprise spacea move that significantly diversifies its merchant base. This shift is evident in its growing list of high-profile clients, including Reebok, Overstock, and Barnes & Noble. By bringing in larger, high-revenue businesses, Shopify is reducing its reliance on SMBs, which tend to be more vulnerable during economic downturns. What stands out to me is how this strategy strengthens Shopify's position, as enterprise merchants have the scale to weather market uncertainties like tariffs while also contributing to more stable, long-term revenue.
A key part of this expansion is Shopify Plus, its premium offering designed for larger businesses. With features like custom storefronts, advanced analytics, and dedicated account management, Shopify Plus positions itself as a serious competitor to enterprise platforms like Salesforce Commerce Cloud and Adobe Commerce. On top of that, Shopify continues to expand internationally, which is another key growth driver that shouldn't be overlooked. All of this expands Shopify's TAM and improves revenue stability, as enterprise clients typically offer higher lifetime value and longer commitments. I'll break down how this could drive long-term top-line growth in the sections ahead.
From a top-line perspective, Shopify's growth is being fueled by a few key factors. First, there's the continued expansion of Shopify Payments, which has become an increasingly significant revenue driver. In FY24, Shop Pay penetration hit 62% of GMVup 4 percentage points YoYmeaning nearly two-thirds of transactions on Shopify's platform are processed in-house. This allows the company to capture a greater share of merchant sales and strengthen its payments ecosystem.
[Shopify Investor Relations]
Another major contributor is Shopify's international expansion, which has been outpacing its U.S. growth. International revenue grew 33% YoY last quarter, with EMEA GMV jumping 37%. International markets now make up 30% of Shopify's total revenue, a sharp increase from just a few years ago. What I find particularly compelling is that despite this strong growth, Shopify still has plenty of untapped potential in global markets. This provides a strong hedge against U.S. economic uncertainty while also giving the company room to scale further. I expect this momentum to continue, especially with Shopify rolling out merchant-focused tools like its Managed Markets offering, designed to help sellers expand into new regions.Enterprise Shift Boosting GMV GrowthShopify's push into the enterprise space is another major factor in its growth story. The company has been actively attracting large-scale brands, and FY24 results confirmed this shift is paying off. What excites me about this transition is that enterprise clients generate much higher transaction volumes and are far less sensitive to economic slowdowns than SMBs. This is clearly reflected in Shopify's GMV, with B2B GMV surging 140% YoY. Large merchants not only bring stability but also help Shopify capture new consumers, adding to the now 875 million unique online shoppers on its platform. More importantly, these big players have the resources to absorb tariff-related costs, making Shopify's business model more resilient.
Despite facing some headwinds, Shopify has demonstrated impressive operating leverage. Gross profit growth has outpaced operating expenses, which is exactly what I want to see in a company scaling this quickly. In fact, full-year operating expenses dropped to a record low of 38% of revenue, underscoring Shopify's ability to grow revenue faster than costs. That said, there has been some pressure on gross margins, which fell 340bps YoY to 46.1%, partly due to the growing adoption of Shopify Payments. However, the company has offset this by improving operating efficiency, cutting sales, marketing, and R&D expenses as a percentage of revenue. As a result, Shopify's pro forma operating margins jumped to 17%a solid 4-point improvement YoY.
[Shopify Investor Relations]
This tells me that Shopify is scaling in a way that doesn't come at the expense of profitability. Its 84% revenue growth rate speaks for itself, and as operating margins continue to improve, it's becoming clear that Shopify can sustain high growth while still driving long-term profitability. If it stays on this trajectory, I believe sustaining 25%+ annualized revenue growth is more than achievable.
Another major positive has been Shopify's improved capital allocation following its decision to offload its logistics arm in mid-2023. Initially, the company had tried to compete with Amazon in fulfillment, but this effort ended up weighing on profitability. The divestiture streamlined operations, reducing TTM CapEx and giving Shopify much-needed breathing room on the financial side. The impact on FCF has been dramaticShopify posted its first sustained period of positive FCF since 2022, with FCF jumping 76% YoY to $1.60 billion in FY24, representing an 18% FCF margin (up 5 points YoY).
[Shopify Investor Relations]
Before 2020, Shopify's FCF was negligible, and while it briefly spiked in 2021, inflation, higher interest rates, and aggressive logistics investments dragged it into negative territory in 2022. Now, with FCF margins in the high teens and strong revenue growth, the company is positioned to continue expanding profitability. The key question now is just how much further Shopify can push these margins in the coming years.
There's no denying that Shopify isn't cheap. However, when I factor in its accelerating growth, its positioning within the "Rule of 40" framework (with ~30% revenue growth combined with high-teens pro forma operating margins), and its dominant role in e-commerce software, I think its premium valuation is justified. To properly assess its valuation, we need to compare it to relevant peers operating in similar spaces. Shopify competes directly with platforms like Wix and BigCommerce in online store-building, while also pushing further into enterprise SaaS, where it's up against Salesforce's Commerce Cloud. Amazon is also a relevant comparison, given its sheer scale in e-commerce.
[Alpha Spread]
When stacked up against these peers, Shopify's valuation stands out. The stock currently trades at a P/E of 74.1certainly high, but not unreasonable considering its growth trajectory. For context, Wix trades at an even loftier 116.5x earnings, while Amazon (38.7x) and Salesforce (49.9x) command lower multiples.
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On a sales basis, Shopify's P/S ratio of 16.8 is significantly higher than its peer group average of 7.3x. This signals that investors are pricing in Shopify's ability to outpace its competition in revenue growthsomething it has consistently delivered, with revenue climbing nearly 84% YoY. That being said, valuation will inevitably act as a ceiling on Shopify's upside, which is a challenge facing most high-growth stocks. There's no sugarcoating itShopify is expensive relative to its peers. But what makes it compelling is its rapid revenue expansion and improving profitability. If growth slows, its valuation could face pressure, but for now, I'm comfortable staying long and holding out for more upside.
[Shopify Investor Relations]
Looking ahead, the broader market trends also work in Shopify's favor. The e-commerce SaaS market is projected to surge from $9.4B to $29.82B by 2032 at a CAGR of 15.5%, while the payment SaaS market is expected to grow from $18.4B in 2024 to $43B by 2030 at a similar 15.2% CAGR. Shopify's headless commerce solutions have strategically positioned it to capitalize on these expanding markets. Additionally, e-commerce penetration remains lowjust 2% in Shopify's core geographies and 1% globallyleaving plenty of room for further adoption. Given management's focus on expanding TAM over the years, I believe Shopify is well-positioned to sustain profitable growth.
Shopify's merchant solutions segment remains central to its future expansion. The e-commerce industry itself offers massive tailwinds, and Shopify's strong execution so far gives me confidence in its ability to keep capitalizing on them. While the consistent revenue and EPS growth reinforce this bullish case, the stock's current valuation doesn't necessarily scream "buy" right now. Shopify's long-term potential is undeniable, but I'd prefer to wait for a pullback before adding more exposure. At a more reasonable entry point, it would offer a better risk-reward balance while still allowing investors to benefit from the company's future growth trajectory.
Shopify remains one of my favorite long-term holdings due to its immense growth potential and the strong tailwinds propelling its business forward. However, its valuation has reached a level where only aggressive growth or long-term investors should feel comfortable buying in. For those who are more risk-averse, waiting for a pullback might be the smarter move. That said, Shopify has repeatedly demonstrated its ability to grow into its valuation, and while downside risks exist, the company's long-term outlook remains compelling. Even if the stock were to drop 30%, it would still be trading at around 50x earningsmeaning it's unlikely to ever be considered "cheap." Given this, my approach is to start with a small position at current levels and add more on dips. This way, I can participate in Shopify's upside while managing risk effectively. For investors who, like me, believe in Shopify's continued dominance in e-commerce, a gradual accumulation strategy makes sense. While consensus estimates might not fully capture its long-term potential, Shopify has repeatedly outpaced expectations. As long as it continues executing well, I see meaningful upside ahead.
This article first appeared on GuruFocus.