Shopify (SHOP -0.96%) the stock has been on a wild ride over the past few years. Coming out of the worst of the pandemic, shares surged more than 400% on huge growth in demand for its e-commerce software and payment tools. Then stocks saw a sharp decline that approached 90% as the pandemic e-commerce boom ended. Today, the stock is up 55% over the past 12 months, but remains significantly behind 2021 highs.

High-growth stocks like Shopify will experience bouts of volatility. But if you look at the company’s underlying financials, you’ll see that it’s making major improvements in growth and profitability. Does this make Shopify stock a buy below $100 a share?

Get back to basics

During the COVID-19 pandemic, Shopify has built big ambitions. It planned to compete directly Amazon with a logistics network, dabbled in cryptocurrencies and even acquired a robotics company.

It has since shut down most of these new initiatives and sold its logistics operations. Management decided to reduce its workforce and laid off 20% of employees. All these sprawling projects caused Shopify to lose focus, and losses followed. At one point, Shopify was generating a $1 billion operating loss in early 2023 and had negative free cash flow.

Today, the company is going back to basics with its two core product platforms. The first is a suite of e-commerce software tools that enable businesses to create and manage online experiences. The second is a suite of payment tools that allow retailers to process payments, primarily online, but also with point-of-sale solutions.

These two sets of software tools are the reason Shopify generates $7.7 billion in annual revenue.

Strong revenue growth, finally showing profits

Including the sale of the logistics business, Shopify’s revenue grew 25% year-over-year last quarter to $2 billion. Even more impressive is the fact that Shopify grew its revenue by 31% year-over-year during the same quarter last year. The e-commerce industry isn’t growing as quickly as a whole, which means Shopify is gaining market share against its competitors.

It also began implementing pricing power on its subscription solutions, which led to minimal churn. This is another good sign that this is a rock-solid company that is set to grow in the years to come.

Best of all, Shopify now grows much more efficiently. Free cash flow margin was 16% last quarter, compared to 6% in the year-ago quarter. Operating margin was 11.8%, which includes stock-based compensation as an expense (free cash flow excludes this figure).

It appears that Shopify expects to continue growing at a rapid pace for the remainder of 2024. Management is forecasting revenue growth in the mid-20% range with double-digit free cash flow margins. Over the long term, I believe the company can continue to grow revenue at a rapid pace as it gains market share in e-commerce and keeps pace with overall industry growth, which is expected to gain market shares in offline retail for at least the rest of the year. the decade.

SHOP operating profit (TTM) data by Y Charts

Should you buy the stock below $100?

Now comes the big test for Shopify: valuation. Even though the stock is down 50% from highs, it is still trading at a hefty market cap of $100 billion at the current price of $80. This represents more than 10 times its sales over the last 12 months.

Let’s do some financial modeling to see if Shopify stock is currently undervalued. Assuming 20% ​​revenue growth over the next five years, Shopify’s revenue will grow from $7.7 billion to approximately $19 billion. Assuming the operating margin can increase from 11.8% to 20%, that equates to $3.8 billion in profits over five years.

Relative to the stock’s current market cap, this represents an estimated five-year forward price-to-earnings (P/E) ratio of 26. Or, exactly where the S&P500 the clue is today. What this should tell investors is that Shopify stock is already pricing in five years of annual revenue growth and margin expansion of 20%. If the stock is only trading at a market multiple in five years, that doesn’t sound very appetizing to me.

Avoid Shopify stock at these prices. The stock is not a bargain, even below $100.