This e-commerce platform provider to small- and medium-sized businesses has gained 60% so far this year and 90% in the past 12 months — a performance very few analysts saw at a time when extreme volatility returned to the markets, and other big tech names, such Facebook Inc., faced uncertain futures on consumer data breaches.
During this period, Shopify’s stock also endured a scathing attack by a famous short seller Andrew Left of Citron Research, who questioned Shopify’s rich price and its business model, raising doubts in investors’ minds.
Despite this environment of uncertainty, Shopify shares continued their upsurge, delivering returns that are the second best when you compare it with the so-called FAANG stocks: Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc., and Alphabet Inc.-owned Google.
In that group, only Netflix is performing better than Shopify after the shares of this movie-streaming company surged 96% this year. For many investors who want to invest in high-octane growth stocks with an aim to double their investment, buying Shopify stock is a tough call to make when this stock has gained so much so quickly.
Shopify stock getting expensive
If you look at some of the valuation metrics, you’ll note that Shopify looks expensive after the double-digit gains this year, especially when the company has not yet generated a full year of profit.
Its shares trade at more than 10 times estimated revenue in 2019, and the company’s enterprise value is 12.9 times sales, or more than double the valuation of competitors such as Wix.com Ltd. and PayPal Holdings Inc.
But judging Shopify stock through the valuation metrics hasn’t worked so far, and the rally in this stock doesn’t seem to be stopping any time soon. One potential reason of this remarkable performance is that small businesses in the U.S. are thriving, and the companies targeting this market will continue to benefit.
According to a recent report in The Globe and Mail, which cited David Kostin, chief equity strategist at Goldman Sachs, the small-business optimism in the U.S. is at its highest level in 35 years. Shopify, where small- and medium-sized companies account for 95% of its revenues, was one of Kostin favourite stocks from this space.
The bottom line
There is no doubt that Shopify stock looks expensive, and investors should be cautious before buying this name, but for risk takers, Shopify is still one of the best bets to double their money. Shopify reported 68% growth in sales in its latest quarterly report, offering guidance that continues to forecast explosive growth.
The company aims to expand into new non-English-speaking markets, targeting some of the world’s largest economies, such as Japan, Singapore, France, and Germany. Trading at $226 a share at the time of writing, Shopify has still got more upside potential, and I won’t be surprised if it surpasses $300 price level in the next 12 months.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Haris Anwar has no position in any stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. Tom Gardner owns shares of Alphabet (C shares), Facebook, Netflix, and Shopify. The Motley Fool owns shares of Alphabet (C shares), Amazon, Apple, Facebook, Netflix, PayPal Holdings, Shopify, and SHOPIFY INC and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Shopify is a recommendation of Stock Advisor Canada.