Cathie Wood has recently increased her stake in Shopify Inc. (NYSE: SHOP), which is set to announce its third-quarter earnings on November 12.
Over the past two weeks, Wood has acquired more than 164,000 shares of the e-commerce leader, showcasing her confidence in the company’s financial outlook.
Shopify is now the largest holding in ARK Invest’s flagship fund, ARK Innovation ETF (ARKK).
However, despite Wood’s optimistic stance, I would caution against following her lead and purchasing Shopify shares at their current valuation.
Shopify’s impressive growth trajectory
There’s no denying Shopify’s rapid growth.
The company has been capturing market share from competitors, outpacing the overall e-commerce sector.
More significantly, Shopify has focused on improving operational efficiency alongside growth.
In the second quarter, the company boosted its free cash flow margin by an impressive 1,000 basis points year-over-year.
Wood’s increased investment in Shopify might also stem from the company’s positive outlook for the remainder of the year.
Management projects revenue growth of approximately 25% and double-digit free cash flow margins for 2024.
Statista’s projections indicate that revenue in the e-commerce market will grow at a compound annual rate of 9.5%, exceeding $6.47 trillion by 2029.
Shopify, with its market share gains, seems well-positioned to benefit from this trend. However, despite agreeing with the long-term potential, I am cautious due to valuation concerns.
Shopify’s stock may be overpriced
Shopify’s current valuation stands at approximately 11 times its trailing 12-month sales.
Assuming the company’s revenue grows from $7.7 billion to $19 billion over the next five years (a 20% annual growth rate), and operating margins expand from 11.8% to 20% within the same period, its projected full-year earnings in 2029 would be around $3.8 billion.
This projection results in a forward five-year price-to-earnings (P/E) multiple of 29, based on Shopify’s current market capitalization of $112 billion.
Comparatively, the benchmark S&P 500 trades at a lower P/E multiple of 27.
In simpler terms, the anticipated revenue growth and margin expansion are already factored into Shopify’s current stock price.
For the stock to become more appealing, an investor would need to believe that Shopify will maintain a premium valuation over the broader market five years from now.
Wall Street’s take on Shopify stock
My reservations are shared by Wall Street analysts. While the consensus rating on Shopify stock is “overweight,” the average price target of $82 implies a potential downside of approximately 7% from current levels.
Furthermore, Shopify does not offer a dividend yield, which could have made the stock more attractive to income-focused investors.
While Shopify’s growth story is compelling, its current valuation leaves little room for error.
Unless you have strong conviction in its ability to trade at a significant premium in the future, caution may be warranted.
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