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

cryptocurrency, crypto, blockchain
Tech Stocks

Everyone Is Talking About Chip Stocks: Are They a Good Long-Term Option?

Chip stocks have been all the rage, but what are long-term investors really in for by buying them on the…

Read more »

Wireless technology
Tech Stocks

3 Tech Stocks You Can Buy and Hold for the Next Decade

Are you looking for Canadian tech stocks that could be multi-baggers in the decade ahead. Here are three small-cap stocks…

Read more »

Businessman holding AI cloud
Tech Stocks

3 Top Artificial Intelligence Stocks to Buy in March

AI stocks are the future, but what about the companies already using it for their own advantage? Here are three…

Read more »

retirees and finances
Tech Stocks

Should You Wait Till 70 To Claim CPP Benefits?

You can earn the maximum CPP payout if you wait till 70 to claim the benefit. But is the wait…

Read more »

financial freedom sign
Tech Stocks

1 Tech Stock Has Created Millionaires and Will Continue to Make More

Are you interested in a tech stock that has created millionaires? Find out which stock that is!

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

This Growth Stock Is Down 26%: Buy, Sell, or Hold?

While many growth stocks took to the sky after the December 2023 earnings, this one growth stock fell 26%. Should…

Read more »

question marks written reminders tickets
Tech Stocks

BlackBerry Stock Is at a 20-Year Low: Is it a Buy?

BlackBerry has been through several ups and downs. But this time, the stock is at its 20-year low. Is this…

Read more »

Two seniors float in a pool.
Tech Stocks

Could Nuvei Stock Help You Become a Millionaire?

Nuvei stock is favourably priced today for growth focused investors to buy. Could the stock enhance your chances to build…

Read more »