Daniel Pronk on $SHOP (Nov 4, 2026)
Shopify's 32% revenue growth and expanding margins are strong, but at 83 times free cash flow the valuation is too high: even with 30% annual free cash flow growth and a still-high 50 times multiple, a DCF implies only 9% compound annual returns, and the multiple will eventually compress as growth slows. He is not interested in owning it now, though he calls it a great business with good results.
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Shopify. Next we'll talk about Intel and Reddit. This is a very interesting topic.
Okay, the next stock we'll talk about is Shopify. Initially, Shopify's earnings results were met with a poor response, and the stock fell as much as 21% in the past month. It looks like the stock is turning around today and is up 6.3% at the time of recording this video, but it is still quite a bit down from recent highs.
And here we see that they achieved 29 % gross merchandise volume growth and 32% annual revenue growth. These are very strong growth rates, especially when overall consumer spending is on a slight decline.
The shop is growing at a rate of almost 30% since 2024, which is very impressive.
They also say that their cohorts are getting stronger over time and they showed us the example from 2015. So their 2015 cohort increased their spending 3.4 times, which is a 12% compounded annual growth rate.
This means that customers spend more on Shopify over time and they become bigger customers over time.
Shopify showed us that their operating income over the past 12 months is $2.1 billion and operating margins are expanding. The same applies to free cash flow, which has reached $2.7 billion in the last 12 months and currently has a free cash flow margin of 19%.
Shopify's cash flow statement is also very clear. Operating cash flow increased 59% to $818 million in the third quarter, and capital expenditures (CAPEX) decreased to just $2 million in the quarter.
This means that almost all of the business's operating cash flow is converted into free cash flow, and it is a very capital-intensive company.
Shopify's revenue growth chart is one of the best I've seen, with the company's annual revenue growth rate at 50% since 2014 and currently growing at 30% per year. It has also launched its Free Cash Flow segment, where free cash flow is growing strongly and has reached $2.3 billion in the last 12 months.
My only problem is that Shopify is currently trading at 83 times its free cash floor, which is a very high price for any business, as I said in the case of Palantir. Shopify is growing rapidly and is very profitable, but in my opinion, the 83x free cash flow value is still too high for this business.
I did a quick discounted cash flow calculation on Shopify, and if Shopify can grow its free cash flow at a rate of 30% per year and trade at 50 times cash flow (which is still high in my opinion), it will only generate 9% compound annual growth from here.
And I think that its multiple will eventually compress, because it's impossible to maintain 80 times free cash flow for 30% growth, especially if the business starts to slow down.
So I'm not personally interested in Shopify right now, but I think it's a great business and its results have been good.