Key Morningstar Metrics for Shopify
- Fair Value Estimate: $105.00
- Morningstar Rating: ★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Very High
Fueled by strong earnings, Shopify SHOP shares surged through the end of 2024. The question facing potential investors is whether it makes sense to put fresh money to work in this notoriously volatile stock.
Shopify stock finished 2024 up 36.5%, but that gain masked a roughly 61% rally in the second half. That surge included a 26% leap in a single day in response to the company’s third-quarter earnings report, which showcased strong margins and a solid outlook, among other positives. Shopify started trading in September 2024 at around $73 per share before its impressive rally in November, reaching a high of more than $119 per share in December. Since then, however, the stock has fallen back by roughly 11%.
These kinds of big swings are in keeping with Shopify’s history. In late 2021, it began a plunge that took its share price from a high of nearly $170 per share to a low south of $30 in 2022. The stock then veered higher toward a February 2024 peak of around $90 per share before falling back to a low of roughly $52 that August.
“Unfortunately for shareholders, Shopify is particularly sensitive to quarterly results, which can produce significant stock moves,” says Dan Romanoff, senior equity analyst at Morningstar.
Shopify Stock Price
Source: Morningstar Direct.
Strong Results Fueled Shopify’s Late 2024 Surge
While software stocks in general had a solid end to the year, Shopify was a standout. Romanoff notes: “Shopify’s results were strong from a variety of facets, including merchant gathering, success in the enterprise, European performance, and a good outlook. Marketing spending came in lower than expectations, while modest headcount additions combined with revenue upside drove strong margins.” He characterizes Shopify’s gross merchandise value as “good,” and says that “payments performance was very good, as enterprise customers are increasingly adopting it.”
Shopify Well-Positioned in E-commerce
Romanoff notes that Shopify is “not a typical software company—only 25% or so of revenue is related to software, while the remainder is merchant services shipping, payments, capital.” He says the company is riding a strong wave. Shopify payments have been gaining traction with enterprise customers, deviating from its image as a small and midsize business solution. “The company has been excellent at introducing new solutions that benefit customers, making the portfolio increasingly relevant for enterprise users, thus enhancing switching costs and contributing to meaningful revenue growth,” he says.
More broadly, “E-commerce remains a secular theme, and Shopify is extremely well-positioned in this market.” Romanoff continues: “Overall, I think the company will continue to generate robust growth with expanding margins over the next five years.”
Shopify Stock Valuation
From Romanoff’s standpoint, “Shopify offers a great product and a compelling value proposition for its customers, along with a narrow moat and good and improving financial performance and participates in a large and growing market. So, it’s worth at least following, if not owning, assuming you are selective about your entry point given the stock’s volatility.” He puts Shopify stock’s fair value at $105 per share, and says its price has come back down near that estimate.
Shopify Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct.
The following are highlights of Romanoff’s current outlook for Shopify and its stock. The full report and more of his coverage are available here.
Economic Moat
We assign a wide moat rating to Shopify, primarily driven by switching costs, with the network effect serving as a secondary moat source. We think both software and merchant solutions have a wide moat based on both moat sources. Given the company’s history of generating excess returns, its complete portfolio of software and services, and its strong competitive position, we think Shopify will probably generate returns over its cost of capital over the next 20 years.
Find more of Romanoff’s analysis of Shopify’s economic moat here.
Fair Value and Profit Drivers
Our fair value estimate of Shopify is $105 per share, which implies an enterprise value/sales multiple of 14 times 2024 revenue and a 1% free cash flow yield. Our forecast includes a continued shift to merchant solutions from subscriptions. We model a 21% compound annual growth rate for total revenue over the next five years. In our view, revenue growth will be driven by new merchants on the platform, Shopify Payments, Shopify Shipping, and Shopify Capital, point of sale, growing gross merchandise value on the platform, and international expansion.
We also assume the introduction of unspecified new merchant solutions over time, such as more financial-related services, although we do not think this is a critical factor over the next several years. We believe the failure rate will remain high on the SMB side, but also that successful merchants will grow to become Shopify Plus enterprise customers. Our GAAP operating margin estimate expands from negative 20% in 2023 (actual) to the low-double-digit area in 2028.
Find more of Romanoff’s analysis of Shopify’s fair value estimate here.
Risk and Uncertainty
Shopify has a Very High Uncertainty Rating. The company generally trades at high multiples relative to peers. While the firm is expected to produce revenue growth at the high end of peers and the premium may be justified, higher absolute valuation levels offer less room for missteps and therefore carry greater inherent risks.
Find more of Romanoff’s analysis of Shopify’s risk and uncertainty here.
SHOP Bulls Say
- Shopify’s growth has been strong and is expected to remain so, with robust new merchant adds, increasing GMV, and high attach rates.
- We believe Shopify is attractive for SMBs because it is simple to use and has a wide variety of built-in features that make it a turnkey solution.
- The company has many experts to help SMBs with website design, photography, and other elements of the process and benefits from a large referral and developer ecosystem.
SHOP Bears Say
- Shopify has traded at lofty valuations at times, and while it might continue to generate strong growth, the company may still fail to live up to optimistic assumptions embedded in the share price.
- Shopify is overexposed to the economic cycle, with the high failure rate for core SMB customers exacerbated by the fact that retail volume would likely decline in a downturn. Additionally, management’s strategy is to avoid going directly to consumers.
- The buildout of the Shopify Fulfillment Network will require substantial investment in both financial terms and management resources.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
