Where Will Shopify Be in 1 Year?

Shopify (NYSE:SHOP) is a massive eCommerce platform used by small, medium and large businesses across the retail sector to power online sales.

Like many tech-related stocks, Shopify has had a good year, having risen by over 75% in the last 12 months. Can Shopify maintain this momentum, and is the stock worth buying for the next year?

The Growth Case for Shopify

Shopify has turned in impressive results over the last year, and the company appears to be well-positioned to continue its streak in the future.

For the full year of 2023, Shopfiy’s revenues rose by 26%, reaching $7.1 billion. Gross merchandise volume, a measure of sales made across Shopify’s platform by the merchants who use it, increased by 20% to $235.9 billion.

Another significant change for Shopify in 2023 was its dramatic turn toward positive free cash flow. In 2022, FCF was negative by $186 million. Last year, however, the company achieved FCF of $905 million.

Net income followed a similar and even more positive track, rising to $132 million for the full year. 2023’s profit came after a full-year GAAP loss of $3.46 billion in 2022.

Shopify also spent much of last year exploring artificial intelligence integrations for its platform that will create additional value for the merchants who use it. These range from an operational workflow assistant to AI-powered product recommendation tools.

In addition to AI tools, the company also added more ordinary functions to its suite of offerings. These included a subscription management tool and a bill-paying function, both of which allow merchants to streamline their business operations.

Looking forward, Shopify still appears to have room to run. The company controls over 16% of the global eCommerce marketplace, providing it with a substantial competitive base. Additionally, the company continues to roll out new tools that make it an integral component of many small businesses.

Even more importantly, the eCommerce space itself is still growing at a rapid pace that provides tailwinds to major industry leaders like Shopify. Through 2030, the global eCommerce market is expected to average a compounded annual growth rate of over 12%.

Given the number of businesses that already choose Shopify and the company’s expertise in adding value for its customer base, it’s quite likely that Shopify will be a prime beneficiary of this trend.

Cumulatively, these factors produce a strong argument for Shopify continuing its streak of strong earnings growth. Analysts project earnings per share to rise at a compounded rate of over 50% in the coming 3-5 years, a trend that could drive SHOP shares higher.

Is Shopify Undervalued or Overvalued?

Shopify trades at 80x forward earnings, 14x sales and 249x cash flow, all metrics that at first glance seem to suggest substantial overvaluation.

However, Shopify is a fast-growing company that could generate outstanding earnings increases over the next several years. As such, the stock may not be trading at the higher premium it appears initially.

The real risk of Shopify’s pricing at the moment is that it leaves little room for missteps or delays. Should Shopify’s growth slow due to economic pressures, technological changes or unexpected disruptions, the stock’s high price creates concerns of sharp selloff.

As such, it’s possible that Shopify is overvalued at the moment, given that the company would likely need to deliver best-case results to justify what investors are paying.

It’s worth noting that investors have already shown some resistance to bidding Shopify up further in the short term. The Q4 earnings report, released on February 13th, detailed 24% year-over-year revenue growth and significant improvements to cash flow margins.

Over the last month, however, Shopify is down 7.7%. This suggests that even very strong performance may not be enough to bolster share prices at the moment, as the stock already has high growth assumptions priced in.

Where Will Shopify Stock Be In 1 Year?

According to the 12-month median price forecast from analysts, Shopify stock can rise to as high as $85 per share, implying an 11% upside.

Analysts project that Shopify stock will offer returns that are largely in line with average market returns over the coming year.

What Shareholders Face? 

A concern for shareholders now is that margins are still very low. In 2023, net margin averaged 1.9%, and return on equity averaged 4.5%.

Shopify made enormous strides in net income in 2023, especially in light of 2022’s losses. At such low margin levels, however, it wouldn’t take much to push Shopify back into the red.

Shopify may very well face the difficulties of a broader slowdown in consumer spending in the near future. Though consumers have been remarkably resilient to inflation, a combination of rising costs, dwindling savings and mounting consumer debt could cause spending to fall later this year.

If this occurs, Shopify and other eCommerce companies could face uphill struggles to sustain revenue and earnings growth.

Is SHOP a Buy for the Next Year?

With Shopify already trading toward the top of its reasonable range, there may not be much upside left in the stock over the next 12 months without significant earnings surprises. It seems likely that SHOP shares will advance to $80-85 over the next year, but this upside doesn’t appear to be sufficient to fully justify the stock’s high price.

This doesn’t detract from the quality of Shopify’s business, which appears to be quite high. However, it’s possible for even the best businesses to be overvalued, especially in the world of tech and eCommerce. If Shopify’s valuation becomes more reasonable as its earnings grow or a correction brings the price down to a more attractive level, SHOP shares could be a good long-term buy.

Overall, Shopify appears to be a hold at current prices. Though the company is turning in excellent performance and appears to be a business with plenty of long-term potential, SHOP shares are just a bit too expensive at the moment.

Investors who already own Shopify will likely see respectable gains on top of the returns of the past year. Those who don’t already own the stock, though, may be able to find better investment opportunities elsewhere.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.