Shopify Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of Shopify (NYSE:SHOP, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $1162 per share and the market cap of $143.3 billion, Shopify stock is believed to be significantly overvalued. GF Value for Shopify is shown in the chart below.
Because Shopify is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 50.2% over the past three years and is estimated to grow 38.20% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Shopify has a cash-to-debt ratio of 7.00, which ranks in the middle range of the companies in Software industry. Based on this, GuruFocus ranks Shopify's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Shopify over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Shopify has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $2.9 billion and earnings of $2.55 a share. Its operating margin is 2.81%, which ranks in the middle range of the companies in Software industry. Overall, the profitability of Shopify is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Shopify over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Shopify's 3-year average revenue growth rate is better than 94% of the companies in Software industry%. Shopify's 3-year average EBITDA growth rate is 0%, which ranks in the bottom 10% of the companies in Software industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Shopify's ROIC is 11.53 while its WACC came in at 10.13. The historical ROIC vs WACC comparison of Shopify is shown below:
In summary, the stock of Shopify (NYSE:SHOP, 30-year Financials)is believed to be significantly overvalued. The company's financial condition is strong and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Software industry. To learn more about Shopify stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.
