Why I’m still bearish on Shopify stock

Actions of Shopify (STORE 1.02%) rose more than 20% this month as investors were encouraged by the company’s strong revenue and gross profit growth. But investors shouldn’t get too excited. There’s good reason to think the stock’s recent rally could be hot air.

Sure, the e-commerce platform company continues to execute well, and management seems to be making a lot of good decisions. The problem, however, is stock valuation — the same problem I’ve complained about in several articles about stocks over the past year. The company is just a long way from living up to its nearly $93 billion market cap as of this writing.

A great deal

For the second quarter, Shopify once again posted strong growth in an uncertain market. The quality of its platform, go-to-market strategy and overall e-commerce macro tailwinds continue to help drive the company’s growth. Shopify’s second-quarter revenue rose 21% year over year, or 25% when you adjust for the sale of its logistics business by stripping out revenue from that business in the year-ago period.

Demonstrating how the company continues to improve its profitability profile, Shopify’s gross profit grew 25% year-over-year — outpacing revenue growth of 21% for Q2.

“Our results underscore our commitment to delivering exceptional value to our merchants through focused operational execution and efficiency,” Shopify CFO Jeff Hoffmeister said in the company’s second quarter earnings release on Aug. 7.

A bad stock

There’s almost no doubt that Shopify will continue to grow its top and bottom line for years to come. The issue, however, is how the company’s underlying earnings match up with its stock valuation. Despite boasting a market cap of $93 billion at the time of writing, second-quarter net income was just $171 million — and nearly half of that ($80 million ) was interest income. Even if you were to extrapolate the company’s $333 million in free cash flow during the quarter to three more quarters, the stock is trading at about 72 times free cash flow.

Of course, Shopify’s free cash flow makes the business look more profitable than it actually is because it excludes Shopify’s stock-based compensation, which came in at $106 million in Q2 alone. While this is a non-cash expense, it still has the very real cost of diluting shareholder ownership.

A free cash flow ratio of 72, while it might not be the best way to value the stock, could at least be within reason if Shopify’s revenue growth rate were to accelerate. But it isn’t. Adjusted for the sale of its logistics business, Shopify’s second-quarter revenue rose 25% — down from adjusted growth of 29% in the first quarter of 2024.

While I’d love to be a part of Shopify’s long-term growth story, I’m not willing to buy shares when they’re priced at tremendous long-term growth in both revenue and profits. I would rather wait to see if I get an opportunity to buy the stock at a discount to a conservative estimate of its intrinsic value.

What if the stock never goes down enough to convince me to buy? No problem. There are always other stocks to consider.