Is Shopify (SHOP) Pricing Still Justified After Strong Multi Year Share Price Gains

• If you are wondering whether Shopify's current share price still makes sense after its long run, you are not alone. The key question now is what that price actually implies about value.
• At a last close of US$166.74, Shopify's stock has returns of 3.6% over 7 days, 5.3% over 30 days, 6.1% year to date, 54.9% over 1 year and a very large gain over 3 years, with 5 year returns of 39.0%.
• Recent attention on Shopify has largely focused on its position as a leading ecommerce platform provider and how that fits into long term digital commerce trends. This context is front of mind for investors who are reassessing what a business like this should be worth after such strong multi year returns.
• On our checks, Shopify currently scores 0 out of 6 for being undervalued. We will look at what traditional valuation approaches say about the stock and then finish with a framework that can help you judge whether those numbers really line up with your own view of the business.

Shopify scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Shopify Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a business could be worth today by projecting future cash flows and then discounting them back to the present. It is essentially asking what all of Shopify's future cash generation is worth in today's dollars.

For Shopify, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections. The latest twelve month Free Cash Flow is about $1.89b. Analyst inputs and extrapolations then project Free Cash Flow reaching $7.07b by 2030, with a full set of annual projections from 2026 through 2035 that are discounted back to today using Simply Wall St's assumptions.

When all those discounted cash flows are added up, the model arrives at an estimated intrinsic value of about $111.82 per share. Compared to the recent share price of US$166.74, this suggests the stock is about 49.1% above the DCF estimate, which indicates Shopify is trading at a premium to this cash flow based assessment.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Shopify may be overvalued by 49.1%. Discover 883 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Shopify.

Approach 2: Shopify Price vs Earnings (P/E)

For companies that are already generating earnings, the P/E ratio is a straightforward way to gauge how much you are paying for each dollar of profit. It ties the share price directly to current earnings, which many investors find easier to relate to than long range cash flow models.

What counts as a “normal” P/E depends on how quickly earnings are expected to grow and how risky those earnings are. Higher expected growth and lower perceived risk can justify a higher multiple, while slower growth or higher risk usually point to a lower one. Shopify currently trades on a P/E of 121.88x, compared with an IT industry average of 31.30x and a peer average of 39.34x, so the headline premium is large.

Simply Wall St’s Fair Ratio concept is designed to go a step further. It estimates what a more tailored P/E might look like, considering factors such as earnings growth, industry, profit margins, market cap and specific risks. For Shopify, the Fair Ratio is 49.24x, which is well below the current 121.88x. On this framework, the stock screens as expensive relative to what those fundamentals would typically support.

Result: OVERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1446 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Shopify Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are clear stories you create about Shopify that link your view of its business, your forecast for revenue, earnings and margins, and the fair value you think is reasonable. All of this happens inside Simply Wall St's Community page, where millions of investors share their views. You can compare, for example, a more optimistic Shopify Narrative that sees fair value near US$200 with a more cautious one closer to US$114, then track how those fair values move against the current price as new news and earnings arrive to help you decide if, or when, it might make sense to act.

Do you think there's more to the story for Shopify? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com