Will Shopify (TSX:SHOP) Be As Hot After Five Years?

Shopify (TSX:SHOP)(NYSE:SHOP) is a great company. But the stock has been running well ahead of its financials for a long time.

| More on:
Photo of a floating bubble

Image source: Getty Images.

The epic rally in Shopify (TSX:SHOP)(NYSE:SHOP) has literally thrashed bears so far this year. The stock continued to march higher despite the valuation concerns and even the broad market weakness.

Shopify after five years

Ever imagine what will be your worth if Shopify grows at the same pace for the next few years? Given its historical returns, if the e-commerce titan follows the same growth path, a $50,000 investment will accumulate to an astounding $1.6 million at the end of five years.

Shopify has been one of the biggest wealth creators for its shareholders and could continue to do so.

However, it wouldn’t be wise to demand similar growth from a company throughout its life. Companies generally get slow as they mature. Shopify is still in its growth phase and will soon slow down as it matures over the next few years.

In fact, Shopify has started to show such trends recently. In 2016, it reported revenue growth of 90% compared to a year earlier. The topline growth has fallen consistently since then. In 2019, its year-over-year revenue growth was 47%. While that’s still impressive growth, it also indicates a steep fall.

A large section of the global population shifting from brick-and-mortar stores to online shopping has been the foundation for Shopify’s growth. Moreover, lockdowns and the pandemic have even more stressed the importance of digital presence.

Thus, Shopify witnessed a huge traffic surge from small and medium-scale businesses in March and April. In turn, it delivered better-than-expected earnings in the first quarter.

It seems like Shopify’s earnings and cash flows matter a little to investors. What they value more is its ability to become the next Amazon.

New product launches indicate aggressive growth plans

Shopify has a large addressable market and has strong growth prospects. More and more businesses will use its platform to set up their online stores.

Its new product range indicates aggressive growth plans of the company. Last month, it introduced Shopify Balance, which mainly targets independent businesses, and helps manage cash flows better.

It also introduced Shop Pay Installments, its new pay-later option for customers, which offers more flexibility at no extra cost. These new products will be launched later this year.

Despite all these growth plans, however, Shopify is still less likely to grow at its historic pace as the first-mover advantage wanes. E-commerce is not a high-barrier to entry in the industry, and the competition over market share will become severe in the years to come.

This will likely be reflected in the stock sooner than later. Based on the next 12-month sales estimates, Shopify stock is trading at a price-to-sales valuation multiple of 50 times earnings! Shopify stock fell approximately 15% recently since its record highs last month.

However, it still looks enormously overvalued, as the stock has been running well ahead of its financials for a long time.

While Shopify is a great company that could well continue to expand at an above-average rate, it has to be re-priced first before moving further higher.

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. Fool contributor Vineet Kulkarni 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, Shopify, and Shopify and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.

More on Tech Stocks

Credit card, online shopping, retail
Tech Stocks

Should You Buy Lightspeed Stock After Its Q4 Earnings?

Despite its volatility, I expect Lightspeed to outperform in the long run due to its healthy growth prospects and cheaper…

Read more »

Shopping and e-commerce
Tech Stocks

Shopify Stock: Is $100 the Next Stop?

Shopify (TSX:SHOP) stock may be headed to the $100 level over the longer term if things fall into the right…

Read more »

Young woman sat at laptop by a window
Tech Stocks

Open Text’s Cloud Kingdom: A SaaS Stock for the Long Haul?

Here's why Open Text (TSX:OTEX) could indeed be a software-as-a-service stock that long-term investors may want to consider right now.

Read more »

clock time
Tech Stocks

Is Now the Right Time to Buy Shopify Stock?

Amid another dip, Shopify stock might be worth buying right now for investors who missed the post-earnings surge.

Read more »

Tech Stocks

Is BlackBerry Stock a Buy for June 2023?

Given its multiple growth drivers, I expect the uptrend in BlackBerry’s stock price to continue.

Read more »

Index funds
Tech Stocks

1 Canadian Tech Stock I’d Buy Before Shopify Stock

Shopify stock is still a good option, but this other tech stock could be even better, especially as it's up…

Read more »

Redwood trees stretch up to the sunlight.
Tech Stocks

3 Safer Stocks I Expect to Keep Growing for Years

Given their growth prospects, I expect the following three stocks to enjoy long-term growth, thus making them attractive buys.

Read more »

Businessman holding AI cloud
Tech Stocks

AI Hype Is Picking Up Steam: Should You Buy the Bounce?

AI stocks rallied when NVIDIA (NASDAQ:NVDA) beat earnings. Could Canadian AI stock Kinaxis Inc (TSX:KXS) be next?

Read more »