Shopify (SHOPPING CENTRE -0.96%) The stock has been on a wild rise over the last few years. Coming out of the worst period of the pandemic, stocks are up over 400% due to a huge increase in demand for e-commerce software and payment tools. Then, as the pandemic e-commerce boom ended, shares fell sharply, approaching 90%. Today, the stock is up 55% over the past 12 months but is still significantly off the highs set in 2021.

High-growth stocks like Shopify will experience periods of volatility. But if you look at the company’s underlying financial statements, you’ll see that it has made great strides in both growth and profitability. Would this make Shopify stock a buy below $100 per share?

Back to basics

During the COVID-19 pandemic, Shopify has set some big goals. There were plans to compete directly Amazon it had a logistics network, dabbled in cryptocurrencies, and even bought a robotics company.

It has since shut down most of these new ventures and sold its logistics operation. Management decided to increase the workforce and laid off 20% of the employees. All these expanding plans caused Shopify to lose focus, and losses followed. At one point, Shopify was generating an operating loss of $1 billion at the beginning of 2023 and had negative free cash flow.

Now the company is going back to basics with two core product platforms. The first is a suite of e-commerce software tools that allow companies to create and manage online experiences. The latter is a suite of payment tools that allow retailers to process payments mostly online but also through point-of-sale solutions.

These two sets of software tools are why Shopify generates $7.7 billion in annual revenue.

Strong revenue growth and finally profit seen

Taking into account the sale of its logistics business, Shopify’s revenue rose 25% from last quarter to $2 billion. Even more impressive, Shopify grew its revenue by 31% year-over-year in the same quarter last year. The e-commerce industry in general is not growing this fast, which means Shopify is gaining market share from its competitors.

It also started to apply pricing power in subscription solutions, which enabled the churn rate to be minimized. This is another good sign that a solid business will grow for years to come.

Even better, Shopify is now growing much more efficiently. Free cash flow margin was 16% last quarter, up from 6% in the prior-year quarter. Operating margin Including share-based compensation as an expense, it was 11.8% (free cash flow does not include this figure).

It looks like Shopify expects to continue growing at a rapid pace through the rest of 2024. Management is forecasting revenue growth in the mid-20% range with double-digit free cash flow margins. In the long term, I believe the company can continue to grow revenues at a rapid pace as it gains market share in e-commerce and underpins the overall growth of the industry, which is expected to gain share from offline retail at least through the rest of the year. ten years.

STORE Operating Revenue (ETC) data Y Charts

Should you buy the stock below $100?

Now comes the big test for Shopify: valuation. Even though the stock is down 50% from its highs, it’s still trading at a high market cap of $100 billion based on its current stock price of $80. That’s more than 10 times sales over the past 12 months.

Let’s do some financial modeling to see if Shopify shares are currently undervalued. Assuming 20% ​​revenue growth over the next five years, Shopify’s revenue will grow from $7.7 billion to $19 billion. Assuming operating margin can grow from 11.8% to 20%, that would equate to $3.8 billion in earnings over five years.

Compared to the stock’s current market cap, this means its five-year forward price-to-earnings (P/E) forecast is 26. S&P 500 index today. What this should tell investors is that Shopify shares are currently pricing in five years of 20% annualized revenue growth and margin expansion. If the stock is going to be traded on more than one market in five years, that doesn’t sound very appetizing to me.

Avoid Shopify stocks at these prices. There’s no bargain on the stock, even below $100.