As anticipated, leading e-commerce platform Shopify Inc (NASDAQ: SHOP) delivered a satisfying good 4Q 2024 performance.
Revenue for the quarter jumped by 31% year-on-year (YOY) to US$2.8 billion, accelerating from the mid-twenties growth in previous quarters.
For the full year, Shopify grew its revenue by 26% YOY to US$8.9 billion, and free cash flow (FCF) surged 76% YOY to US$1.6 billion.
Even more impressive is Shopify’s ability to boost its free cash flow margin from 13% last year to 18% this year.
The peak of 22% in the fourth quarter demonstrates remarkable operational efficiency and strong business growth.
Firing In All Cylinders
“When our merchants become more successful, Shopify becomes more successful” describes the company’s core approach in driving its growth.
Shopify’s track record is a strong indication that this approach has worked for the company.
Not only did Gross Merchandise Value (GMV) compounded annually at 25% over the past four years, the growth accelerated despite challenging macroeconomics, resulting in an exceptional six consecutive quarters of over 20% growth in GMV.
And as shown in the above image, other leading measures such as Monthly Recurring Revenue (MRR), and Gross Payment Volume (GPV) are also showing strong growth trajectory.
Opportunities Aplenty
While Shopify has already tripled its top line over the past four years, there are still plenty of opportunities for it to grow into.
By management’s estimate, Shopify only penetrated 2% of the Serviceable Addressable Market (SAM).
Additionally, by creating new products and expanding into more countries, Shopify has continuously increased its addressable market.
For instance, the launch of its fully rebuilt and reimagined Shopify POS (in 2020), which helps retailers to connect their online and in-store sales, provided a new growth driver for the company.
For FY 2024, this segment grew significantly by 33% YOY to US$588 million and is expected to continue to expand going forward.
Furthermore, with Shopify’s growing reputation, it continues to enjoy the flywheel effect.
As President Harley Finkelstein shared in the earnings call, Shopify is attracting increasing attention from retailers and major brands in the recent completed NRF’s Retail’s Big Show, as compared to a year ago.
Should You Invest in Shopify?
While its business model is undeniably compelling, the decision hinges on your risk tolerance and investment horizon.
Currently, at approximately US$130 per share, Shopify’s stock trades at a premium, with a price-to-free cash flow (P/FCF) ratio exceeding 110x!
Even with a projected 30% free cash flow growth in FY 2025, the forward P/FCF remains a high 80x.
However, if Shopify sustains its current growth trajectory for the next three to five years, the current valuation may prove justified.
Conversely, any execution missteps could trigger a sharp, short-term price decline. My recent experience from The Trade Desk provides a good reference.
In fact, just less than three years ago, the misstep made by Shopify on the logistics business has caused its price to plunge by more than 85% within a year!
Will that happen again? Your guess is as good as mine.
Based on my experience, I would either wait for a more favourable entry point or initiate a small position to mitigate potential FOMO while limiting downside risk.
Ultimately, the risk-reward assessment is a personal one for you to make.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please do your own research before making any investment decisions.
Discover more from The Fat Investor
Subscribe to get the latest posts sent to your email.