Shopify Inc. (NYSE:SHOP) has unveiled impressive Q4 results, revealing a significant surge in its free cash flow (FCF) margins to 21%, up from 16% in the previous quarter. This remarkable performance suggests that SHOP stock could be undervalued by as much as 20%. Investors are exploring short-put plays for additional income opportunities, buoyed by the company’s strong fundamentals.
Despite experiencing a dip to $79.06 following yesterday’s market downturn, SHOP stock could potentially reach $95.27 per share, representing a substantial increase driven by its robust FCF margins.
Rapid Expansion in FCF Margins
Shopify reported a 23.5% year-over-year increase in Q4 revenue, reaching $2.155 billion in 2023, or 30% growth after adjusting for the sale of its logistics business. Additionally, FCF surged from $90 million in the previous year’s Q4 to $446 million in Q3 2023, accounting for 23.5% of revenue, a significant leap from 5.2% in the previous year.
Furthermore, the company achieved a remarkable turnaround in FCF generation for the full year, soaring to $905 million from negative $186 million in the prior year.
Forward-Looking FCF Forecasts
With forecasts projecting continued growth, Shopify anticipates its FCF margin to reach 20% in Q1, with sequential improvements expected throughout the year, potentially reaching 22% to 23% by year-end. Analysts forecast revenue to climb to $8.53 billion in 2024 and $10.16 billion by 2025 year-end, indicating a robust forward trajectory.
Assessing SHOP Stock’s Value
Applying a 21% FCF margin to forecasted revenues for 2024, SHOP’s FCF could approach $2 billion, leading to a market capitalization valuation of $130.6 billion. A more conservative estimate using a 1.60% FCF yield metric suggests a market cap rise to $122.5 billion, indicating a potential target price of $95.27 per share, representing a 20.6% increase over the current market value.
Exploring Income Opportunities with Short-Put Plays
Investors are capitalizing on Shopify’s high put option premiums by shorting out-of-the-money put options, generating additional income while awaiting potential stock appreciation. Shorting puts with strike prices below the current stock price, such as the $75.00 or $73.00 strikes, offers immediate yields of 1.81% and 1.16%, respectively, providing income opportunities over the short term.
Mitigating Downside Risk
While the exercise of these puts could result in potential unrealized losses if the stock falls to the strike prices, investors remain confident in Shopify’s undervaluation, backed by its strong fundamentals and promising growth prospects. Additionally, selling covered calls on acquired shares can offset potential losses, further enhancing income opportunities.
Conclusion
With Shopify stock appearing undervalued, investors have the option to purchase the stock and engage in short-put plays while awaiting potential price appreciation. Shopify’s robust performance and promising outlook signal a compelling opportunity for investors seeking both income and capital appreciation.
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