The e-commerce company is undervalued and positioned for high long-term growth although some risks still remain
By Oliver Rodzianko
Summary
- Shopify is moderately undervalued with a margin of safety of 14.7% and offering a potential 11% CAGR in enterprise value over 15 years, making it a long-term opportunity.
- Shopify’s low-code/no-code tools position it to capitalize on the creator economy’s projected growth from $191B in 2025 to $528B by 2030, empowering SMBs and independent creators globally.
- Risks include competition from established tech giants entering the creator space and sensitivity to economic downturns, but long-term trends like automation and potential UBI could amplify growth.
Shopify (SHOP, Financial) appears to be undervalued based on my 15-year discounted cash flow model, offering the potential for an 11% CAGR in its enterprise value over the period. Therefore, the stock currently presents a compelling long-term investment opportunity. That said, despite the strong potential in a burgeoning SMB and creator economy, competitive risks from established tech players could pose challenges over time. Nonetheless, Shopify’s strategic positioning and robust financial performance make it a favorable candidate for investors with a long-term horizon.
Operational and financial analysis
Shopify—the e-commerce platform designed to empower businesses of all sizes with tools for online, in-person, and global selling—is already well known. Its reputation is hinged on website building, product management, payment processing, analytics, marketing tools, and other initiatives to support companies reliant on e-commerce for successful operations. However, based on my analysis, its significant long-term opportunity lies in its distinct focus on facilitating infrastructure ideal for a burgeoning creator economy.
The platform’s low-code/no-code tools empower creators to launch fully functional online stores with minimal resources, democratizing access to e-commerce for small businesses and independent creators. The global creator economy is projected to grow from $191 billion in 2025 to over $528 billion by 2030, with a compound annual growth rate of 22.5%. Currently, North America dominates the creator economy market, holding 40% of the global share—its value is expected to grow from $32.28 billion in 2025 to $142.91 billion by 2030.
Based on Shopify’s most recent Q3 2024 earnings report, its Merchant Solutions revenue (which is heavily driven by small merchants) accounted for 71.8% of its total revenue. Shopify Plus, the enterprise-level plan tailored for larger businesses, contributed 25% of monthly recurring revenue. Therefore, the company is already dominantly structured around supporting smaller businesses, which bodes very well for it as the creator economy continues to boom amid AI and automation trends replacing corporate jobs.
According to Goldman Sachs (GS), AI and automation may replace up to 300 million full-time jobs in the near future—some reports go as high as 800 million by 2030—with white-collar workers and manufacturing employees being particularly vulnerable. Therefore, it’s reasonable to assess that the market for independent creators and small businesses is going to become more saturated, providing a revenue boost to Shopify as the leading provider of e-commerce solutions for small businesses.
The medium-term outlook is strong, but I am even more optimistic about Shopify’s long-term potential. Over the next 10 to 20 years, it’s plausible that many corporate and manufacturing functions will become fully automated. A growing consensus suggests that universal basic income may be implemented, further fueling the creator economy. This shift could unlock economic resources, driving spending in creator economies and small business networks.
Valuation analysis
Because I believe Shopify works as a very long-term investment, I use a 15-year horizon for my valuation model. To be conservative, I apply a 15% revenue CAGR starting from the December 2024 consensus estimate of $8,792 million. This projects a December 2039 revenue estimate of approximately $71,594 million.
By 2039, Shopify is likely to have transitioned from a high-growth phase to a more stable, cash-generating phase. Considering that mature SaaS and e-commerce platforms like Adobe, Microsoft and AWS often maintain free cash flow margins between 25% and 35%, I will use a terminal free cash flow margin of 30% to remain conservative. This results in an estimated December 2039 free cash flow of about $21,478 million for Shopify.
For my valuation model, I am using a conservative terminal EV-to-FCF ratio of 30, which is lower than Adobe’s, Microsoft’s, and Amazon’s at the time of this writing. This is because the company is unlikely to command the moat and goodwill of Amazon or Microsoft as leading Big Tech companies. Therefore, my December 2039 enterprise value estimate for Shopify is approximately $644.34 billion. Given the company’s current enterprise value of $134.39 billion in November 2024, this indicates an enterprise value CAGR of about 11% over the period.
Shopify’s five-year median weighted average cost of capital is 8.78%, though it is currently higher at 20.42%. This is largely due to market volatility that coincided with the decline of tech stocks amid overvaluation in 2022, affecting the beta and distorting the cost of equity. Therefore, I am using a typical 10% average annual market return as my discount rate. Discounting back the $644.34 billion from December 2039 to November 2024 using 10% as my discount rate gives a present implied intrinsic enterprise value of approximately $154.17 billion. As the current enterprise value is $134.39 billion, this indicates a margin of safety of about 14.7% for investment. Therefore, Shopify appears to be undervalued based on this valuation model.
Risk analysis
There are two significant risks with my thesis that deserve attention. The first is that Shopify operates alongside rivals like Amazon, WooCommerce, and BigCommerce. While Shopify has targeted a niche in the SMB and creator economy fields, larger players such as Amazon are continuously expanding into the creator economy space. This could erode Shopify’s dominance as competitors deploy substantial resources for integration with social platforms, payment gateways, and global logistics.
Secondly, while the creator economy is growing, its reliance on discretionary consumer spending makes it very sensitive to macroeconomic conditions, including recessions and inflation spikes. Smaller businesses also have higher failure rates in economic downturns, which could significantly negatively impact Shopify’s Merchant Solutions revenue. Additionally, an oversaturated market of independent creators could drive down overall creator incomes, and Shopify’s total addressable market could be smaller than my operational analysis indicates.
Q3 earnings insights
Shopify delivered a strong Q3 performance, achieving a 26% year-over-year increase in revenue, marking its sixth consecutive quarter of over 25% revenue growth (excluding logistics). Additionally, free cash flow surged 53% year-over-year, showcasing improved operational leverage. For Q4 2024, management anticipates revenue growth in the mid-to-high twenties percentage range year-over-year, alongside a free cash flow margin comparable to Q4 2023.
These results highlight significant momentum, making it unsurprising that the stock has gained following their release. This strong performance reinforces the company’s positive trajectory and supports my valuation model indicating that Shopify is undervalued.
Conclusion
Based on my valuation model, which indicates an 11% CAGR from November 2024 to December 2039 in Shopify’s enterprise value and a margin of safety of about 14.7%, Shopify appears to be undervalued. The company’s strategic positioning in the rapidly growing creator economy, coupled with its robust financial performance, suggests substantial long-term growth potential.