Is Shopify Stock a No-Brainer Buy Below $100?

Shopify (NYSE: SHOP) stock has gone on a wild ride over the last few years. Coming out of the worst of the pandemic, shares shot up over 400% due to the huge growth in demand for its e-commerce software and payment tools. Then, shares went in a sharp drawdown that approached 90% when the pandemic e-commerce boom ended. Today, the stock is up 55% in the last 12 months but still off significantly from highs set in 2021.

High-growth stocks like Shopify will go through bouts of volatility. But if you look at the company's underlying financials, you'll see it is making major improvements in both growth and profitability. Does that make Shopify stock a buy below $100 a share?

Getting back to basics

During the COVID-19 pandemic, Shopify built up some grand ambitions. It had plans to compete directly with Amazon with a logistics network, dabbled in cryptocurrencies, and even acquired a robotics company.

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

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

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

Strong revenue growth, finally showing profits

Adjusting for the sale of the logistics business, Shopify's revenue grew 25% year over year last quarter to $2 billion. Even more impressive is the fact Shopify grew revenue 31% year over year in the same quarter a year ago. The e-commerce sector is not growing this fast as a whole, meaning Shopify is gaining market share from competitors.

It has also started to implement pricing power on its subscription solutions, which has led to minimal churn. That's another good sign that this a rock-solid business set to grow for years to come.

Even better, Shopify is now growing much more efficiently. Free-cash-flow margin was 16% last quarter, expanding from 6% in the prior year's quarter. Operating margin was 11.8%, which includes stock-based compensation as an expense (free cash flow excludes this figure).

It looks like Shopify expects to keep growing at a quick pace for the rest of 2024. Management is forecasting revenue growth in the mid-20% range with double-digit free-cash-flow margins. Over the long term, I believe the company can keep growing revenue at a quick pace as it gains market share in e-commerce and rides the general growth of the sector, which is expected to gain share from offline retail for at least the rest of the decade.

SHOP Operating Income (TTM) data by YCharts

Should you buy the stock below $100?

Now comes the big test for Shopify: valuation. Even though the stock is down 50% from highs, it still trades at a hefty market capitalization of $100 billion at the current stock price of $80. That is more than 10 times its trailing-12-month sales.

Let's do some financial modeling to see whether Shopify stock is undervalued right now. Assuming 20% revenue growth for the next five years, Shopify's revenue will go from $7.7 billion to around $19 billion. Assuming operating margin can expand from 11.8% to 20%, that equates to $3.8 billion in earnings in five years.

Compared to the stock's current market cap, that is a five-year forward price-to-earnings ratio (P/E) estimate of 26. Or, right around where the S&P 500 index is today. What this should tell investors is that Shopify stock is already pricing in five years of 20% annual revenue growth and margin expansion. If the stock is only going to trade at a market multiple in five years, that doesn't sound too appetizing to me.

Avoid Shopify stock at these prices. The stock is no bargain even below $100.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.