Shopify (TSX:SHOP)(NYSE:SHOP) has been a million-maker stock. In some cases, it was a billionaire-maker investment.
Today, shares are above $400, resulting in a market cap of $45 billion.
The company is still growing like a weed, but perhaps it’s time to rethink whether shares are a buy. It’s tough to find a more pricey stock on the market, at least when it comes to valuation multiples. Still, time and time again, Shopify has proven that it warrants a hefty premium.
Using all of the information we have today, is Shopify stock still a buy?
Plenty of growth ahead
So far this year, Shopify stock has doubled. That’s because the company continues to prove that it can grow immensely.
In 2015, sales doubled. In 2016, sales doubled again. Annual growth rates of 80-90% were achieved in both 2017 and 2018.
This year, analysts expect revenue growth of 40-50%. Analysts also anticipate 2020 to maintain this growth rate. This pace is lower than the past, but still impressive for a company with over $1 billion in sales.
In total, Shopify has likely tapped less than 1% of its ultimate sales potential. Competition may begin to erode this potential, but one thing is certain: Shopify will grow at breakneck speeds for years to come.
What about earnings?
Sales growth is great, but in the end it must translate into profits.
Despite predictions of a loss, Shopify has actually turned a profit in each of the last four quarters. As its business scales, analysts anticipate earnings to materialize quickly.
This year, consensus estimates forecast US$0.57 per share in earnings. That means the stock trades at a whopping 530 times forward earnings! That’s expensive, but if profits surge, it could quickly become a bargain.
For 2020, consensus earnings are expected to be US$0.95 per share, resulting in a forward valuation of 320 times 2020 earnings. That’s a bit better but still expensive.
If Shopify maintains this expected EPS growth rate, shares could trade at 30-40 times earnings within three years. That’s an incredibly reasonable price to pay for such a strong business.
Here’s the catch
Thus far, Shopify has had the market to itself. Nearly every quarter, the company takes market shares. And rightfully so, considering it essentially invented the current paradigm.
This year, the equation changed.
As I’ve reported, several tech behemoths have entered the fray, including Microsoft, Facebook, and Square. Even $150 billion giant Adobe will compete directly with Shopify following its acquisition of Magneto.
With a combined market cap of $2 trillion, this group of competitors will be hard to fend off.
Shopify will likely continue to grow rapidly, especially considering its early-mover advantage and leading e-commerce platform, but earnings may not materialize as quickly as anticipated.
Thus far, Shopify has bested consensus estimates for earnings with little to no competition. As competition heats up, these surprise profits may disappear.
Competitors like Facebook and Microsoft are likely willing to go years or even decades without turning a profit to establish dominant market share. That’s a strategy Shopify may not be able to afford.
Ultimately, the most likely outcome is for Shopify to be acquired. Its platform simply makes too much sense not to be integrated into another tech giant’s portfolio. Whether this comes at a premium to today’s sky-high price is yet to be seen. Perhaps a buyer will wait for a short-term drop in price to take action.
Either way, understand that Shopify has a difficult road ahead of it. If the market continues to rate the stock based on sales growth — as it’s done perpetually with Amazon.com — shares will continue to surge higher. If the market flips and demands to see profits, the multiple could contract quickly.
Right now, Shopify stock is clearly a high-risk, high-reward scenario. There’s plenty of growth ahead, but the nose-bleed valuation doesn’t make it an obvious bet. Invest at your own risk.
