Shopify Inc. (TSX:SHOP)(NYSE:SHOP) has been off to a roaring start this year, up ~50% year to date. That is a big improvement over the tail end of last year, when the share price tumbled and failed to gain any momentum after investors hit the panic button over what I’d considered to be a very biased report on the company’s business model.
However, with that now in its rear-view mirror, the stock looks unstoppable again, and it seems that reaching $200 will be a forgone conclusion at this rate. The bigger question is if the stock could hit $250 this year. Let’s take a look at whether or not that price is a realistic target for the stock this year.
Sales growth will be key
In the company’s most recent quarter, sales were up more than 70% year over year, and in just two years revenues have more than tripled. If Shopify can just maintain that level of growth, then it should have no problem seeing its share price continue to rise.
The counterpoint to this would be that while 70% sales growth is certainly impressive, it’s actually down from how well the company has performed over the past few years. In 2015 and 2016, Shopify effectively doubled its sales and saw its top line nearly quadruple in just a couple of years.
However, it’s hard to maintain that level of growth, especially as the company’s numbers continue to climb. Even at this reduced growth rate, it still presents a large hurdle for the company to be able to meet consistently.
Will investors continue to pay a big premium for the stock?
Currently, the share price trades at a multiple of 28 times its sales, and if the company’s top line can grow by just one-third this year, then it should be able to reach a price of $250 if the multiple stays intact. For Shopify to increase sales by less than even 40% seems like a very low target, and odds are it will soar past that.
However, there’s no guarantee that investors will still be willing to pay such a big premium. Although we’ve seen high price-to-sales multiples in the pot industry, outside that industry, it has been rare.
Given the recent pullback we’ve seen in the markets, investors appear to be more concerned about valuations lately, as rumblings of a bear market are making people think twice about whether a stock is a good buy or not.
Could hype fuel the stock the rest of the way?
We’ve seen what momentum can do for pot stocks, and right now we’re seeing a very similar impact on Shopify. The growth we’ve seen so far this year is higher than what I would have expected, given the results, and suggests that the popularity of the stock is back, and that’s a very good thing.
The problem is that we could again see another variable affect the stock price. Whether it is fear in the markets or negative news surrounding the company, the stock has shown that it isn’t immune to those risks, and while it may be outperforming the market thus far, it doesn’t take much for investors to turn to selling mode.
It’s not a wise decision to bet against Shopify, but to reach $250 the stock would nearly double this year. That’s a lot to ask of any stock right now, and a lot has to go right for the company to be able to pull that off. It’s a long shot, but it’s not one I would expect the stock to be able to hit unless its earnings report is able to show even stronger growth than it has been in the past year.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.