The Motley Fool

Is Shopify (TSX:SHOP) Headed for $500?

Shopify (TSX:SHOP)(NYSE:SHOP) has been on a remarkable run this year with its share price continuing to reach new heights. Year to date, the stock has already doubled, reaching more than $388 on Wednesday. And there’s still potential for the stock to continue to climb higher given the strong momentum behind it.

One of the reasons Shopify has attracted investors is because of its very strong growth over the years. While its rate of increase is slowing down, finding a company that can consistently achieve year-over-year growth of around 50% is difficult. And there’s still lots of potential for Shopify to continue to grow around the world.

Anyone looking to sell products online could be a potential Shopify customer, and that’s why even with over $1 billion in sales in the past year, there’s still so much more that the company can achieve, even despite growing competition.

Momentum is strong, but the stock is still not overbought

Although the stock has been climbing at a rapid rate, it’s still not in overbought territory. Despite being at its 52-week high, the stock is at a Relative Strength Index (RSI) of around 66. RSI looks at a stock’s average gains and losses over the past 14 trading days, and once it moves over 70, it’s considered to be overbought and could be due for a drop in price.

What this suggests is that Shopify’s rate of increase has been more of a gradual one than if it had jumped suddenly. The stock has had periods where its RSI reached over 80 this year, but that too hasn’t been enough to deter investors from buying and holding the stock. From a momentum standpoint, I wouldn’t be surprised if the stock hit $400 sometime this month, and $500 is certainly not out of the question later this year.

What its multiples say

Shopify’s numbers will tell you the stock is overpriced by a wide margin. With a market cap of more than $40 billion, it’s quickly becoming one of the biggest stocks on the TSX. Popular tech stocks are normally given higher valuations by investors because of their growth potential, and so it shouldn’t come as a big surprise that Shopify has moved up the ranks as quickly as it has.

However, with no income and the stock trading at more than 20 times its book value and about 36 times its sales, it’s not a stock that’s suitable for value investors. For investors that see that value in Shopify, they’re going to need to look past multiples and at what lies ahead for the company.

Bottom line

A lot on where Shopify’s price goes will depend on what happens to the markets. With a beta of close to one, Shopify will rise if the markets continue to do so and if investors remain bullish on tech stocks. However, if concerns surrounding tariffs and trade issues with China weigh down stocks as a whole, Shopify could suffer.

There’s definitely potential for the stock to hit $500, but everything has to go well — not only for the company, but the markets themselves. And that’s not something that I would expect to happen given all the uncertainty surrounding trade and politics that we see today.

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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. Shopify is a recommendation of Stock Advisor Canada.

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