In recent years, it is arguable that there has been no better investment on the TSX Index than Shopify (TSX:SHOP). Since going public in 2015, Shopify’s stock has jumped 1,151%! The stock was a mainstay at number one on our list of the top Canadian stocks to buy.
To put its stock appreciation into perspective, a $10,000 investment in its stock when it first began trading on the TSX would be worth $115,100 today. Not a bad return in less than five years.
In March of this year, the company joined the TSX 60 Index. This Index tracks the 60 largest companies on the TSX. Considering its young life, this is a significant accomplishment.
If that wasn’t enough, yesterday the company passed telecommunications giant BCE Inc (TSX:BCE) in terms of market cap. With a market cap of $56.19 billion, Shopify is larger than notable blue-chip stocks such as Canadian Imperial Bank of Commerce (TSX:CM) and Suncor (TSX:SU).
As of end of day yesterday, Shopify is now the 10th largest company in Canada.
Is Shopify’s current valuation justifiable? That is also up for debate. The company hasn’t been consistently profitable and it is trading at 43 times revenue. Once again, let’s put this into perspective.
Over the past twelve months, Shopify has posted $1.3 billion in revenue. On the flip side, BCE and Suncor have posted $23.76 and $38.46 billion respectively. They are also highly profitable and pay a stable and growing dividend.
I understand that these companies are not directly comparable. However, it is still important to understand the premium you are paying for Shopify at today’s prices. At $499.15 per share, it is also worth noting that it is trading at a 13% premium to analysts one-year price estimate of $442 per share.
Over the next couple of years, revenue is expected to grow at a 50% clip and earnings are expected to rise by 62% on average. These are impressive growth numbers. It is also what is underpinning the company’s valuation.
Since it went public, Shopify has never missed earnings or revenue estimates. Given this, it is likely that the company will meet the aforementioned growth rates. However, I do caution investors. Any miss on earnings will no doubt sent its price crashing. Most likely in the 20%+ range.
Similar hyper-growth stocks such as Canada Goose Holdings (TSX:GOOS) have suffered a similar fate.
Should you start a position in Shopify today? Given the current market volatility and Shopify’s current valuation, I would caution against it. Considering we have seen an inverted yield curve and there are talks of a recession, it is a high-risk play.
In a market correction, growth stocks are often hit the hardest and Shopify could be a prime candidate for a significant downturn.