Daniel Kent is long SHOP.TO and GOOS.TO
Canadian tech giant Shopify (SHOP.TO) has been taking the TSX by storm lately. Up over 125% in 2019, the company may be able to ride its current momentum to a $500 price point. However, are investors making a huge mistake by purchasing the stock at these levels?
What Exactly Does Shopify Do?
Shopify is one of the leading e-commerce platforms in the country, and is slowly becoming one of the go to platforms worldwide. Merchants use the platform to grow their sales business across a multitude of channels, including social media and pop-up shops. Shopify’s platform takes care of both the payment and shipping hassles of running a business, and does it with a top level of efficiency. As such, the company has grown its network to include over 800 000 businesses in over 175 countries.
SHOP.TO Has a Strong History Of Outperformance
Any investor looking at a stock like Shopify (TSX:SHOP), especially with its current gains in 2019, would be wise to be cautious. However, the company has beat analyst expectations on a consistent basis. In terms of both revenue and earnings, Shopify has posted better than expected numbers in each of its last 5 quarters.
With revenue coming in at a consistent 4-7 percent above expectations, Shopify is growing revenue at a groundbreaking pace. Year over year, the company has increased sales by over 33% and analysts expect the company to not only match that growth in 2019 but exceed it, posting revenue growth near the 40% mark.
In terms of earnings, Shopify has outperformed at an extensive pace. The company quite frequently posts blowout earnings numbers, often coming in over 150 percent better than expected.
Given these numbers, it’s no question SHOP’s price increase is somewhat justified. Trading sideways in the $185 to $215 range for the better part of 7 months, investors were becoming frustrating, and rightfully so. But ever since the stock broke its resistance point over around $215, there seems to be no stopping it.
The question now remains, both to prospective buyers and current holders, what is the true value of this stock? Should I be buying SHOP at these levels, and if I own it should I be putting a stop loss in place? The question is more difficult to answer than you can imagine.
Shopify’s Success Depends Solely On Forward Momentum
An object in motion tends to stay in motion. We all know how that works, and for Shopify to continue its current trend, the company needs to keep pushing out strong quarters. We’re dealing with a stock here that is trading at 40 times sales and 22 times book value. As soon as Shopify posts a lackluster earnings report we can expect the stock, much like all growth stocks, to tumble. How far it tumbles relies solely on investor confidence.
A prime example of this in recent times is Canada Goose (TSX:GOOS). The company beat earnings and revenue estimates, much like it has done every quarter since its IPO in 2017, but failed to meet estimated growth numbers. As analysts expected near 30% growth for the retail company over the next year, Canada Goose guided down to 20-25% growth.
This unfortunately sent the stock into a tailspin, losing over 30% of its value in a single day. The stock has since recovered a large chunk of that loss back, but it just shows you the true volatility with high potential growth stocks on the TSX.
So How Can Shopify Keep The Momentum?
The only way Shopify can continue to carry on this level of growth is to invest heavily into innovations to its current platform. With a debt to equity of 4.78, SHOP has debt, but not an exorbitant amount of it. The company has issued shares in the past, as recently as December of 2018, and investors need to be aware that further dilution is possible.
However, recent features have done nothing short of boost investor confidence, as the company has stated in its most recent investor news release that it has 6 key new features in development for its platform.
One of its most important features is its Fulfillment Network, which is aimed at its southern customer base in the United States. The network will serve to provide new centers located in all parts of the United States. A machine learning system will ensure that deliveries of product are quicker and cost less. Ultimately, an online platform like Shopify’s is dependent solely on customer experience. And its Fulfillment Network puts it front and center.
So, Is Shopify Overvalued?
In the grand scheme of things, it’s hard to not find a high potential growth stock like Shopify that isn’t overvalued. However, when investing in growth stocks it’s important to invest in companies that will one day reward investors with future results, at the cost of an extensive premium during its growth stages.
I can’t think of a better company to do so, at least on the TSX, than SHOP. Until they prove otherwise in the form of a poor earnings report or stalling growth, there is no reason to believe that Shopify is going to slow down any time soon. In fact, some people are saying the company could even rival the online giant Amazon.
Will there be an inevitable dip in price? I would say yes, but as we all know it’s extremely hard to time the market. Actually, most would say it’s impossible. Following a strict Dollar Cost Averaging strategy usually will leave you in a better position to reap the long term rewards of the stock market.