Should You Buy Shopify Inc. (TSX:SHOP) in Your TFSA? Probably Not

First off, I am not saying that you shouldn’t buy Shopify Inc. (TSX:SHOP)(NYSE:SHOP) at all. So those of you who love the stock, I’m not trying to talk you out of it. As a conservative-leaning investor, though, I would suggest that you not put it in your TFSA.

I’m sure you’re asking yourself, why would I not put it in my TFSA? Just look at the glorious capital gains the stock has achieved over the past few years. And I would definitely think that if you had bought this in your TFSA and sold it today, you would have locked in a tidy tax-free profit.

However, this article is not about addressing the past, but rather about addressing the potential risk of holding Shopify in a TFSA. Of course, nobody knows whether the stock will continue rising or whether it will fall precipitously. All one can do is look at the present and seek to ascertain the potential risks facing the stock.

If the stock were to continue to rise and were held in a taxable account, you would of course have to sell the stock to realize your capital gains. When you do that, you will be taxed at a favourable rate. In a TFSA, there are no capital gains. But if the stock were to fall in a taxable account, you could sell the stock and use the capital loss to offset any capital gains in your account. That capital loss could be carried forward and applied against capital gains in the years ahead.

The problem with Shopify lies in its valuation. The company currently has negative earnings and negative free cash flow, which is generally a great starting point. With no earnings or free cash flow, the company is trading with a market cap of over $21 billion CAD.  The company also had revenues of only US$214.3 million in Q1 2018.

Think about that for a moment. Dollarama Inc. (TSX:DOL), which itself is an expensive company, has a market cap of $16 billion and generated revenues of $756.1 million in Q1 2018. It also actually had earnings of $0.92 a share. I’m trying to give you a sense of scale and how Shopify is priced for perfection.

Again, I am not saying that Shopify isn’t a good company or that it does not have improving financials. I know the company is growing fast and that revenues increased 68% year over year in the first quarter. I know that the company has US$1.5 billion in cash and virtually no debt. Its balance sheet is strong and the growth is there.

Shopify is a growth stock and people are piling in. This means that if anything goes wrong, people can just as quickly pile out.

Your TFSA room is precious, and if for some reason the stock collapses, as favoured stocks priced to perfection do from time to time, that room is gone. In a taxable account, you can take the loss and write it off. Sure, you may have to pay some capital gains down the line if everything turns up roses. But is it worth the risk to potentially lose some valuable tax-free room if Shopify were to fall? Maybe not.

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Fool contributor Kris Knutson 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.

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