I’m a big proponent of Warren Buffett’s mantra of buying the best-quality business you can find at reasonable prices. The rest is just details.
There’s just one problem. Most excellent businesses have been identified by thousands of Buffett devotees, folks who spent their free time scouring balance sheets and growth projections. Therefore, these stocks skyrocket in price, and more value-focused investors who refuse to pay the inflated price get left behind.
This leaves investors with two options. They can either pay the price and buy in no matter what the underlying value of the company is. Or these folks can remain patient and wait around for a good time to buy.
A fantastic business
As Amazon gets bigger and bigger, it’s obvious many prominent brands are going to step away from the world’s largest online retailer and run their own websites.
Nike’s decision to leave the Amazon platform illustrates exactly why. Nike execs were frustrated that third-party sellers would rank higher in search results than product from the manufacturer itself. And the company felt Amazon didn’t do nearly enough to protect customers from counterfeit goods. A counterfeiter could be back on the site within hours of being discovered operating under a different name.
If Amazon doesn’t get this situation under control, I predict many more companies will start pulling their products and investing instead into their own e-commerce solutions.
This, of course, is great news for Shopify. As the leader in providing the software, payment processing, and other services for more than a million merchants across the world, it’s the natural choice to power these new entrepreneurial ventures.
In fact, analysts are projecting Shopify to grow the top line to more than US$2.1 billion next year — an increase of some 35% compared to 2019’s numbers. You won’t find that kind of growth most anywhere else.
Yes, Shopify loses money each quarter, but much of that can be explained by the company’s laser focus on making life easier for its merchant partners. Large investments have been made expanding into other markets, providing centralized warehouses that make shipping for eligible merchants cheaper and quicker, and getting into payment processing for more traditional stores.
Add all this together, and we have a business that is unlikely to be disrupted anytime soon. That’s the basis of a company with staying power.
But what about valuation?
I won’t try to pretend Shopify shares are anywhere close to cheap. The stock is expensive on every traditional metric.
The good news is, shares are considerably cheaper than what they were just a few months ago. Shopify shares peaked at just over $541 each on the Toronto Stock Exchange in the late part of August. The stock is now more than 25% cheaper, checking in at just over $400 per share. That’s quite the haircut.
Not much has changed in those few months, either. Shopify’s growth expectations are still excellent, and management is still hyper-focused on expanding outside its core competency. Investors are slightly less bullish, that’s all.
Remember, if Shopify grows revenue by 30% on a year-over-year basis, and the stock trades at the same price-to-sales ratio it does today, shares will be 30% higher by the end of 2020. You could argue that’s an arbitrary valuation method, but the issue with Shopify (and stocks like it) is that it doesn’t trade based on valuation. Sentiment is what matters.
The bottom line
2020 could be a volatile year for Shopify stock, depending on what the market thinks about it.
Underneath the stock price, we should see a company that continues to grow the top line by 30-35% per year with a relentless focus on making life better for its customers. Although it might not show up on the bottom line, this investment into the long-term health of the business will end up being a good one.
This focus on customers is why Shopify remains my top Canadian tech stock for 2020, 2021, and beyond.
One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Nelson Smith has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Nike, Shopify, and Shopify.