This pandemic brought about a once in a decade market crash. One of the few stocks that managed to rally and, thanks to its sheer magnitude, contributed to the stability of the TSX was Shopify (TSX: SHOP)(NYSE:SHOP). Even now, the stock is trading at about 93% higher than its start-of-the-year value.
As one of the best growth stocks on TSX, it is rightfully overvalued. Many investors and analysts believe that it’s pushing past the adequate boundaries at its current peak, and it’s now dangerously overvalued.
Currently, its forward price-to-earnings value is about 298 times, and price-to-book is 28.8 times. The goodwill makes up over 11% of the company’s total assets.
Despite its overvalued position, there is little doubt that Shopify is still a millionaire-maker stock.
A millionaire-maker stock
Shopify stock grew by over 2,800% in the past five years, thanks in part to its rapid growth since the fall in March. It means that if you invested just $36,000 exactly five years ago, you would be sitting on a million dollars right now.
A case can be made that Shopify’s current growth rate is too fast to be sustainable, and the stock is bound to normalize in a few weeks or months.
Even if we discard the glory-days growth of Shopify, how much growth a stock really needs to make you a million dollars? $50,000 growing at a pace of 83% a year can make you a millionaire in five years. And that’s less than Shopify’s current five-year CAGR (97%).
Even if we take a mere fraction of it (one-fifth), with the same capital, Shopify growing at a rate of 19.4% can make you a millionaire in 17 years.
Depending on the number of years you have to grow, your capital, and the promise that Shopify will at least keep growing at a fraction of its current pace, it’s safe to say that it’s a millionaire-maker stock.
The underlying danger
Such growth cannot be without its risks. Currently, its overvaluation is one of the reasons that investors are a bit wary of this stock. It’s one of the largest stocks presently trading on the TSX, and many investors are sure that this inflated growth will soon crash down to a more rational, pre-pandemic valuation.
One of the reasons for that is Shopify’s primary consumer-base, the small- to medium-sized businesses, is the most vulnerable bunch if a post-pandemic recession hits.
Some other troubling news is from 2020’s first quarter’s results. The operating income, which has been in the red since 2015, dropped further, as Shopify funnels a great deal of money into research and development. But it also brings down the EBITDA and net income margin. At 5.1%, the return on equity is also low at negative.
Foolish takeaway
It usually pays off to be prudent. Even if Shopify is a millionaire-maker stock, you don’t want to buy it when its stock price is overly inflated. You can wait for it to normalize and resume a stable growth pace before making an investment in Shopify.
