This month's pullback in market indexes, particularly in tech, has weighed heavily on the stock prices of some of tech's best performers this year. One of those stocks is e-commerce platform provider Shopify (SHOP +1.31%). Though shares are up about 55% year to date, they're notably down about 20% this month.
With the stock pulling back so substantially, some investors may be wondering if now is a good time to buy it. After all, the company reported better-than-expected second-quarter results earlier this month, featuring accelerating top-line growth.
To help investors consider whether they should buy shares today, here's a look at Shopify's second-quarter update and the stock's valuation.
NASDAQ: SHOP
Key Data Points
Accelerating growth
For its second quarter, Shopify reported 31% year-over-year revenue growth, putting its top line at about $1.7 billion. This easily beat analysts' consensus forecast for revenue of $1.62 billion. Also worth noting, this was an acceleration from the 25% revenue growth the company reported in the prior quarter.
The quarter's revenue growth was helped by a 17% year-over-year increase in gross merchandise volume transacted on Shopify's platform; a 35% growth in merchant solutions revenue; and a 21% increase in subscription-solutions revenue. A combination of growth in merchants the company serves and price hikes that went into effect in April played a vital role in the company's solid uptick in subscription-solutions revenue.
"We're not just shipping products faster, but we are also expanding our global merchant base, all while improving our ability to generate greater free cash flow," said Shopify president Harley Finkelstein in the company's second-quarter earnings call.
To Finkelstein's point about free cash flow, it was $97 million for the period, up from negative $87 million in the year-ago quarter. Not only was this the company's third consecutive quarter of positive free cash flow, but Finkelstein said in the company's second-quarter earnings call that he expected the critical profitability metric to "continue to trend even higher throughout the rest of the year."
Valuation
While Shopify's business execution is impressive, the bull case for the stock starts to fall apart when you look at valuation. The company has a market capitalization of more than $69 billion as of this writing, so it's difficult to make a case that the stock is worth this much.
For instance, investors should note that Shopify still isn't consistently profitable. Its trailing-12-month operating loss was $517 million. This is not too far off from the $476 million and $549 million operating losses it reported in 2021 and 2022, respectively.
The growth stock even looks overvalued using analysts' average estimate for non-GAAP earnings per share by the end of 2027. The stock trades at 32x analysts' average forecast for an annual adjusted earnings per share figure more than four years away.
What about the stock's valuation, compared to its free cash flow? With trailing-12-month free cash flow of just $124 million, you don't even need to do the math. The $69 billion company's price-to-free-cash-flow ratio is absurdly high.
Shopify is a great company. Its recent top-line acceleration (even if much of it was due to price increases) is promising. Further, robust, double-digit growth in gross merchandise volume highlights its momentum with merchants. But investors may want to look for a better entry price before they consider buying shares.
