What Will Shopify Be Worth In 2023?

| About: Shopify (SHOP)

Summary

In this article, I will analyze 4 simple long-term scenarios to forecast Shopify's valuation in 2023.

Shopify currently trades at a forward P/E of +270 and a P/S of +22.

The recent acquisitions of Magento by Adobe and Weebly by Square will create a stronger competition.

With no distinguishable moat, long-term growth is questionable.

Shopify's (SHOP) growth since its IPO has been outstanding. However, the stock price has run ahead of its fundamentals. With revenue expected to come at $1 billion in 2018, Shopify is trading at 17x times forward sales, and growth is starting to slow down. 2018 expected revenue growth is 48.55% YoY, much lower than the 73% YoY growth achieved in 2017.

Although this revenue growth is still impressive, the market has already priced in a beat for this year and for several years to come. With a market cap of $17 billion, Shopify will not only need to maintain its impressive revenue growth, it will have to start expanding operating margins by a considerable amount.

This will prove difficult, as Shopify currently has no major moat, its business has low barriers of entry and its only competitive advantage is scale. We will most likely see a major acquisition soon, as Shopify has over $1.5 billion in cash, but I doubt that this acquisition will provide a major moat.

In addition, this $1.5 billion in cash has come from increasing their outstanding shares by more than 13% since March 2017 (from 90.24 million in March 2017 to 102.25 million in March 2018), effectively diluting their shareholders for cash that Shopify does not need.

Creating the scenarios

For creating the different scenarios I only used 5 variables: YoY revenue growth in 2018, revenue growth rate slowdown, 2023 operating margin, yearly share dilution and forward P/E. All scenarios use a 21% tax rate.

I will not be using a discounted cash flow model for these scenarios, as I said at the start of the article, this will be a very simple analysis. I will simply use earnings per share and forward P/E for calculating the stock value at the start of 2023.

The most recent information that I could find for operating margin is from the following earnings call, so I will use a final operating margin of 20% for my best case scenario.

Michael Nemeroff

Hey, guys. Thanks for taking my questions. It’s for Russ. My question is on profitability. In Q4 you generated a non-GAAP operating margin greater than 5%, while you were growing greater than 70%. I know you said, Russ, the Shopify is a growth company. But at what level of growth or what size is the business before you either let more profitability come through? Or you just can't control the profits from occurring? Because as we look out several years into our DCF value the shares, the terminal multiple is swayed meaningfully by a margin. Do you see, Russ, Shopify becoming a 20% to 30% non-GAAP operating margin business over the next five to 10 years?

Russ Jones

That's always been our sort of inspirational goal. And if you look at both Q3 and more importantly Q4, I think we had a nice check-in on that achievement. And so, yes, I do think we'll get there, but really given our sort of market and competitive position and what we’re seeing in commerce right now in the sort of that short to midterm our focus is really going be on continue to grow the number of merchants on the platform and our share of wallet, because we think creating a bigger piece of pie positions us much better once we want to sort of move more towards achieving longer-term profitability goals.

Source: Q4 2017 Earnings call transcript

Scenario 1

  • Shopify grows revenues 55% YoY in 2018, beating the expected 48.55%.
  • Revenue growth rate slows down 10% annually.
  • 2023 operating margin is 20%.
  • Yearly share dilution is 2%.
  • Forward P/E is 40.
2018 2019 2020 2021 2022 2023
YoY Revenue Growth 55.0% 49.5% 44.6% 40.1% 36.1% 32.5%
Revenue (In millions) $1,043.62 $1,560.20 $2,255.28 $3,159.53 $4,299.66 $5,696.06
Operating Margin -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Operating Income (In millions) -$52.18 $0.00 $112.76 $315.95 $644.95 $1,139.21
Net Income (In millions) -$41.22 $0.00 $89.08 $249.60 $509.51 $899.98
Shares Outstanding (In millions) 104.00 106.08 108.20 110.37 112.57 114.82
Earnings Per Share -$0.40 $0.00 $0.82 $2.26 $4.53 $7.84

In this scenario, SHOP would be worth $313.51 per share in 2023, assuming it trades at 40x times forward P/E. This would give us a 14.4% annual return if we use the current price of $160.

Scenario 2

  • Shopify grows revenues 50% YoY in 2018, beating the expected 48.55%.
  • Revenue growth rate slows down 15% annually.
  • 2023 operating margin is 20%.
  • Yearly share dilution is 2%.
  • Forward P/E is 35.
2018 2019 2020 2021 2022 2023
YoY Revenue Growth 50.0% 42.5% 36.1% 30.7% 26.1% 22.2%
Revenue (In millions) $1,009.95 $1,439.18 $1,959.08 $2,560.64 $3,228.98 $3,945.34
Operating Margin -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Operating Income (In millions) -$50.50 $0.00 $97.95 $256.06 $484.35 $789.07
Net Income (In millions) -$39.89 $0.00 $77.38 $202.29 $382.63 $623.36
Shares Outstanding (In millions) 104.00 106.08 108.20 110.37 112.57 114.82
Earnings Per Share -$0.38 $0.00 $0.72 $1.83 $3.40 $5.43

In this scenario, SHOP would be worth $190.01 per share in 2023, assuming it trades at 35x times forward P/E. This would give us a 3.5% annual return if we use the current price of $160.

Scenario 3

  • Shopify grows revenues 48.55% YoY in 2018.
  • Revenue growth rate slows down 20% annually.
  • 2023 operating margin is 20%.
  • Yearly share dilution is 3%.
  • Forward P/E is 30.
2018 2019 2020 2021 2022 2023
YoY Revenue Growth 48.55% 38.84% 31.07% 24.86% 19.89% 15.91%
Revenue (In millions) $1,000.19 $1,388.66 $1,820.14 $2,272.59 $2,724.52 $3,157.96
Operating Margin -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Operating Income (In millions) -$50.01 $0.00 $91.01 $227.26 $408.68 $631.59
Net Income (In millions) -$39.51 $0.00 $71.90 $179.53 $322.86 $498.96
Shares Outstanding (In millions) 104.00 107.12 110.33 113.64 117.05 120.56
Earnings Per Share -$0.38 $0.00 $0.65 $1.58 $2.76 $4.14

In this scenario, SHOP would be worth $124.16 per share in 2023, assuming it trades at 30x times forward P/E.

Scenario 4

  • Shopify grows revenues 48.55% YoY in 2018.
  • Revenue growth rate slows down 25% annually.
  • 2023 operating margin is 15%.
  • Yearly share dilution is 4%.
  • Forward P/E is 30.
2018 2019 2020 2021 2022 2023
YoY Revenue Growth 48.55% 36.41% 27.31% 20.48% 15.36% 11.52%
Revenue (In millions) $1,000.19 $1,364.38 $1,736.98 $2,092.75 $2,414.23 $2,692.38
Operating Margin -5.00% 0.00% 3.75% 7.50% 11.25% 15.00%
Operating Income (In millions) -$50.01 $0.00 $65.14 $156.96 $271.60 $403.86
Net Income (In millions) -$39.51 $0.00 $51.46 $124.00 $214.56 $319.05
Shares Outstanding (In millions) 104.00 108.16 112.49 116.99 121.67 126.53
Earnings Per Share -$0.38 $0.00 $0.46 $1.06 $1.76 $2.52

In this scenario, SHOP would be worth $75.64 per share in 2023, assuming it trades at 30x times forward P/E.

Create your own scenario

If you do not agree with the scenarios I used in the article or want to create your own, feel free to use the template I used to create these tables: Shopify.xlsx (excel file).

I look forward to hearing your opinions and seeing your forecasts in the comments.

Conclusion

Shopify needs to get a lot of things right to justify its current valuation and generate decent returns for the next 5 years. Their next acquisition may certainly help them achieve these returns, but I am not getting my hopes up.

I would not recommend shorting Shopify until the market changes its opinion, as the stock has shown no signs of stopping its upwards trend. Nevertheless, buying shares at these levels is a very risky investment that most likely won't generate worthwhile returns anytime soon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.