Once a stock reaches the $1,000 mark, it's natural for investors to wonder whether it's time to opt for something new. A lot needs to go right for both the stock and company to exceed that price, but I think Shopify Inc.'s (SHOP, Financial) gains are far from over.
Business prospects
E-commerce growth has been exponential, and it's expected to continue growing at an increasing rate.
Shopify is one of the major players in the space; the fact the company has managed to establish itself as a market leader has consolidated its strong earnings.
I anticipate income to continue growing as the company's continuous expanding on critical segments such as Shopify shipping, Shopify payments and Shopify capital. Additional expansion is anticipated as the company has formed formidable partnerships with Amazon.com Inc. (AMZN, Financial) and Facebook Inc. (FB, Financial). In addition, international expansion into the Europe, Middle East and Africa regions will add diversification to Shopify's revenue.
The company has increased its marginal recurring revenue by 62% year over year. Consolidating recurring revenue while expanding into new markets makes up for higher-quality earnings.
I decided to look at the return on invested capital chart to place tangible value on my argument regarding expansion.
The upward slope in ROIC is more often than not an indicator of a gain in competitive advantage. Shopify's continuous expansion could well lead to the company dominating the global turnkey e-commerce space.
Shareholder value
One can justify the company's growth by analyzing its business model, but company growth and stock growth aren't always as correlated as many may think.
The diluted earnings per share figure has skyrocketed since 2020 as the company reported a positive net income for the first time since listing on the New York Stock Exchange.
If net income growth remains positive and the amount of shares outstanding remains as low as it is, shareholder value could be maximized, and the company's growth will fully reflect in the stock price.
Valuation
By making a relative comparison, one could argue that a PEG ratio of 5.09 is well above the ideal and that a price-sales ratio of 50.66 shows revenue doesn't justify the stock price, but I think this company is best valued by using a mergers and acquisitions technique where the enterprise value/Ebitda ratio is multiplied by free cash flow and then divided by shares outstanding. My reason is that Shopify has increased the company's value more than earnings through intangible asset base growth, which has yet to reflect in its earnings. I also think it's important to consider the number of shares outstanding.
(413.70 x $490.6 million)/113.20 = $1792.94 per share.
Based on this calculations, and according to pure absolute valuation metrics, Shopify undervalued by around 24%.
Final word
Shopify is undervalued by approximately 24% without considering growth. If growth prospects are considered, the stock could reach very high levels for as long as it doesn't issue excessive shares.
