E-commerce specialist Shopify (SHOP 2.63%) saw its shares take a hit on Wednesday following its latest earnings report. While revenue for its fourth quarter came in ahead of analysts' consensus forecast for the period, it marked a deceleration from its Q3 growth rate. During a period when many investors are expecting accelerated growth as companies integrate AI (artificial intelligence) into their businesses, the market may have been hoping for stronger growth than Wall Street analysts were.
But some investors may be wondering whether the tech stock's 6.7% decline on Wednesday went too far, potentially creating a buying opportunity. After all, it adds to an already difficult year for the growth stock. Unfortunately, I think shares remain overvalued, even after a more than 26% decline already in 2026.
Here's a closer look at why I'm not buying the dip in Shopify's stock price.
Image source: Getty Images.
Strong fourth-quarter results
Just because I don't like the stock doesn't mean I can't like the business. And Shopify's fourth-quarter results continued to show a company firing on all cylinders.
Shopify's fourth-quarter revenue grew at an explosive rate, climbing 31% year over year. Additionally, its bottom-line performance was impressive. Net income, when excluding the impact of equity investments, rose about 30% year over year during the period.
And free cash flow, which represents its cash flow from operations less capital expenditures, remains a strength for Shopify. The company's free cash flow rose 17% year over year to $715 million. That translated into an impressive 19% free cash flow margin. And on a full-year basis, Shopify's free cash flow rose 26% year over year to more than $2 billion.
With strong free cash flow and no debt on its balance sheet, Shopify launched a massive share repurchase program, authorizing up to $2 billion to buy back its own stock.
"We are launching this share repurchase program from a position of financial and operating strength," said Shopify chief financial officer Jeff Hoffmeister in the company's earnings release, "as clearly demonstrated by the results we announced today."
Throughout the company's earnings call, management emphasized how AI is enhancing its business. And the company provided some encouraging numbers, too. Shopify president Harley Finkelstein said during the company's fourth-quarter earnings call that, since January 2025, orders on its platform from AI search have increased 15-fold. Of course, Finkelstein clarified that this is off a small base, but "that's still a really big jump in 12 months."
The company is also using AI to automate workflows and tasks for merchants, ushering in an era that Shopify calls agentic commerce.
NASDAQ: SHOP
Key Data Points
A frothy valuation
With such impressive momentum in its underlying business, why am I still refraining from buying the dip in the growth stock's share price?
The main reason is valuation.
As of this writing, Shopify has a forward price-to-earnings ratio in the sixties. With a forward price-to-earnings ratio measuring a stock's valuation by looking at its price as a multiple of analysts' consensus forecast for earnings per share over the next 12 months, this is a good metric for evaluating a fast-growing company like Shopify.
But does Shopify really deserve a forward price-to-earnings ratio this high? I don't think so. To justify this valuation, Shopify would need to deliver exceptionally strong earnings-per-share growth for years to come. Being more specific, Shopify would likely need to grow its earnings per share at an average compound annual growth rate in the twenties or higher for the next decade to live up to this valuation. In other words, I think the valuation is a bit euphoric, leaving almost no room for any detours or slip-ups.
Further, with Shopify's top-line growth rate actually decelerating in Q4 compared to Q3, when revenue rose 32% year over year, it begs the question: Are AI commerce experiences simply cannibalizing traditional e-commerce channels, or will the era of agentic AI be incremental for Shopify?
With that said, even if AI helps Shopify gain more market share than it would without it, I think the current valuation already prices this in, so I'm not buying the stock today.
