Shopify Stock Is Soaring This Week. Here's Why.

Shares of Shopify (NYSE: SHOP) popped over 25% this week, according to data from S&P Global Market Intelligence . The e-commerce software and payments platform reported earnings for the second quarter that wowed investors. After seeing slowing growth coming out of the COVID-19 pandemic boom, Shopify has gotten its mojo back and is now generating a solid amount of profits. However, the stock is still down year to date as of after the close on Thursday, Aug. 8.

Here's why Shopify stock flew 25% higher this week.

Solid growth, expanding margins

In the second quarter of 2024, Shopify's revenue grew 21% to $2 billion. This was driven by more spending on Shopify powered commerce websites -- known as gross merchandise volume (GMV) -- which grew 22% year over year. Sixty-one percent of Shopify's payment volume is now processed by its internal payment systems, which come with a higher take rate and therefore drive revenue growth for the business. Last year in the second quarter, this number was 58%.

After increasing prices for monthly subscription fees, the subscription segment grew 27% year over year to $563 million in revenue. This is impressive and shows Shopify has a lot of pricing power with its merchant customers.

Even more impressive is Shopify's profitability, which has improved immensely even while it invests for growth. Operating margin has jumped to positive territory over the last 12 months, a quick jump from the heavy losses it took a year ago. The free-cash-flow margin has jumped to 16%, equating to $333 million in free cash flow in the quarter. Over the last 12 months, it has generated over $1 billion in free cash flow.

Is the stock a buy?

After rising 25% this week, Shopify now trades at a market cap of $88 billion. Its revenue keeps climbing, management is flexing its pricing power muscles, and the free-cash-flow margin is expanding. Even so, the stock still looks expensive.

The company has barely generated $1 billion in free cash flow over the last 12 months, or an 88x multiple to the current market cap. Most stocks trade at 10x to 30x free cash flow. Sure, Shopify's revenue is growing quickly and hit $7.5 billion over the trailing 12 months. Let's say revenue hits $10 billion and free-cash-flow margin hits 20% within a few years. That equates to $2 billion in free cash flow, or still over a 40x multiple compared to the current market cap.

If you are buying Shopify shares after this bump, you need to be confident that 20% revenue growth will continue along with margin expansion. If it doesn't, the stock is likely overvalued at these prices.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy .