Shares of Canada’s e-commerce giant Shopify (TSX:SHOP)(NYSE:SHOP) have been on an absolute tear in 2020. Shopify stock is up close to 100% in 2020 and is now Canada’s largest company in terms of market cap. It closed trading at $1,053.59 per share on May 12, which means its market cap is $123.6 billion.
While Shopify stock has crushed market returns ever since going public in May 2015, it is currently trading at a sky-high valuation. It has a price-to-forward sales multiple of 48 and a price to book value of 28.
Several growth stocks such as The Trade Desk, Okta, Alteryx and Twilio are trading at much lower valuations. The Trade Desk has a price-to-sales multiple of 23. This figure for Okta, Alteryx and Twilio stands at 34, 18 and 18.3, respectively.
Shopify remains a solid long-term pick given its expanding addressable market. However, I believe the stock will correct significantly, giving investors a chance to buy it at a cheaper multiple. Wall Street analysts tracking Shopify have an average price target of $512.5, which is 31% below its current trading price of US$742.28.
We have seen such e-commerce stocks as Amazon and Shopify have easily outperformed broader markets. As governments around the globe have shut economies, people have no option but to shop online, accelerating the online shopping trend and driven shares higher.
Etsy stock might be a winning bet for growth investors
Another e-commerce company that has more than doubled in the last two months is Etsy (NASDAQ:ETSY). Etsy announced its Q1 results on May 6 and reported revenue of $228.06 million, which is higher than analyst estimates of $220.2 million. Etsy’s platform experienced a growth of 32.2% in gross merchandise volume that stood at $1.35 billion. Comparatively, Q1 sales were up 34.7%.
After a volatile March, Etsy confirmed that the number of face masks sold on its platform in April rose to 12 million and bought in $133 million in GMV. In an interview to CNBC, Etsy CEO Josh Silverman stated that the number of new shops on its platform doubled last month and sellers are pivoting to the changing needs of the people.
Silverman stated, “We also experienced broad-based demand across the marketplace leading to over 100% growth for the Etsy marketplace in April.” Total GMV in April rose 130% to $860 million.
Etsy primarily depends on increasing its seller and buyer base to drive revenue. A higher number of sellers will increase GMV, seller fees, payment fees as well as ad revenue.
In order to get more sellers on its platform, Etsy temporarily waived seller ad fees until May 1. It’s also providing sellers with a one-month grace period for billings, helping the latter improve short-term liquidity.
For the second quarter, Etsy forecast GMV between $2 billion and $2.2 billion, an increase of 80% to 100% year-over-year. Comparatively, sales are expected to rise around 80% to between $310 million and $340 million. This forecast was significantly higher than average analyst sales estimates of $213.48 million.
The Foolish takeaway
As mentioned earlier, I am not bearish on the long-term prospects of Shopify. But its valuation is through the roof, making it a vulnerable buy in an uncertain macro environment. Etsy is growing at a faster pace and is valued at a forward price to sales multiple of 10.8.
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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.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. Tom Gardner owns shares of Okta, Shopify, The Trade Desk, and Twilio. The Motley Fool owns shares of and recommends Alteryx, Amazon, Etsy, Okta, Shopify, Shopify, The Trade Desk, and Twilio and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.