Shopify ( STORE -5.06% ) recently announced a 10-to-1 stock split that will be effective June 28 for shareholders of record June 22, assuming shareholder approval. This means that Shopify’s current stock price of $439.50 would be $43.95 after the split.
Although the decline in the share price could stimulate demand for the stock, it would likely prove temporary. What supports stock price appreciation over the long term is corporate performance. This is why the recent drop in Shopify stock price seems like a good buying opportunity. Nearly 600 million shoppers transacted with Shopify merchants in 2021, a 31% increase from 2020.
It seems like almost every online store I come across uses Shopify for the checkout process, and that leads me to consider buying stock for at least three reasons.
1. Sustained revenue growth
Shopify’s business is easy to understand. He makes money selling subscriptions to tools that help businesses open and manage online storefronts. Shopify offers additional services – what the company calls merchant solutions – for payment processing (Shopify Payments), shipping and fulfillment, lending (Shopify Capital) and even applications through the App Store of Shopify.
Competition in e-commerce is growing, and it’s one of the reasons merchants are embracing Shopify. In 2021, revenue grew 57% year-over-year to $4.6 billion, with most of that growth coming from merchant solutions. This means businesses continue to adopt additional services after subscribing, which says a lot about Shopify’s value proposition.
2. Free cash flow growth
A knock against Shopify was that the company did not turn a profit. However, the growth of higher margin merchant solutions has turned the company’s situation upside down. For 2021, Shopify reported adjusted net income of $814 million, or $6.41 per share.
Based on free cash flow, which shows the actual amount of cash generated by the business, Shopify has also shown improvement from negative to positive cash generation over the past few years.
3. Stock offers better value
Shopify’s business continues to grow and free cash flow is starting to build up, which is great to see. Improving fundamentals make the stock’s lower price-to-sales (P/S) ratio very tempting, currently sitting just above 12 times sales. This is much more attractive than the 60 times sales it sold a year ago.
What’s not to like? Revenue growth is expected to slow in 2022 as the pandemic-driven e-commerce surge begins to fade. Moreover, competition is intensifying. Amazon just announced the Buy with Prime program, which extends fast shipping and free shipping offers to merchants who sell through Amazon, which could put Shopify in the tech titan’s crosshairs.
But again, that’s why investors can buy Shopify at its cheapest valuation in three years. The stock is still quite expensive, but as the valuation drops, I am preparing for the possibility of starting a position.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.