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What counts as a “normal” P/E depends on how the market views a company’s growth potential and risk. Higher expected growth and lower perceived risk can justify a higher multiple, while slower growth or higher uncertainty usually point to a lower one.

Shopify currently trades on a P/E of 81.90x. That is above the IT industry average of 26.51x and also above the peer average of 36.66x. Simply Wall St’s Fair Ratio for Shopify is 46.69x. This Fair Ratio is a proprietary estimate of what the P/E might be, given factors like earnings growth, profit margins, industry, market cap and specific risks.

Because it blends these company specific drivers, the Fair Ratio can be more informative than a simple comparison with peers or the broad industry. Comparing the two, Shopify’s current P/E of 81.90x versus the Fair Ratio of 46.69x indicates the shares are trading above that modelled level.

Result: OVERVALUED

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Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which let you attach a clear story to your numbers by pairing your view on Shopify’s future revenue, earnings and margins with an assumed fair value.

A Narrative is simply your structured view of the company. You connect what you think Shopify’s business story looks like over time to a financial forecast, and then to a fair value that you can compare with the current share price.

On Simply Wall St, millions of investors share these Narratives on the Community page. This makes it easy for you to see different scenarios, use the tools without complex modelling, and see whether your own Fair Value sits above or below the current price, which can help you decide if and when you might want to act.

Because Narratives refresh automatically when new information such as earnings reports or major news is added to the platform, one investor might build a Shopify Narrative that assumes strong revenue growth and a higher fair value, while another assumes slower growth and a lower fair value. Both can instantly see how their stories stack up against the live market price.

Do you think there’s more to the story for Shopify? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include SHOP.

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