Warning: 1 Expensive Stock I’d Look to Take Profits On

Shopify Inc. (TSX:SHOP)(NYSE:SHOP) looks a bit too frothy for your portfolio after more than doubling over the course of two months.

| More on:
TIMER SAYING TIME FOR ACTION

Image source: Getty Images

As an investor, it’s your job to be ready for whatever the unpredictable market throws your way.

If it pitches a bargain, you should swing, regardless of what that market strategist on TV predicts will happen over the short term. And if you’ve made a considerable amount from a contrarian position, you should take some profits off the table if you no longer think the fundamentals are worth the higher multiple.

While it seems as though the markets can only go higher given that the Fed has its back, I’d urge investors to be wary of some of the frothier names on the TSX Index amid the recent rush back into stocks.

Consider shares of Shopify (TSX:SHOP)(NYSE:SHOP), which more than doubled off March lows. It is looking too hot to handle for a majority of value-conscious growth investors.

Whenever you’re given a chance to play with the house’s money, you should take it!

I urged investors to back up the truck on Shopify stock when shares imploded during the coronavirus crash. I noted then that the company was likely to view lockdowns as a tailwind, as tech-unsavvy physical retailers rushed to gain a digital presence to salvage lost sales.

The stock broke-out to new all-time highs, blasting past the $1,000 mark. The valuation quickly got out of hand, as its customer additions skyrocketed. The stock soon found itself sporting a price-to-sales multiple above 50 (that’s sales, not earnings!), making it one of the most expensive stocks an investor will ever come across.

There are a lot of things to love about the company, including its major tailwinds, the brilliant management team led by visionary founder Tobias Lütke, and its demonstrated resilience in times of economic hardship. But, it’s only prudent to take some profit off the table after shares doubled up in just under two months.

Shopify may be a wonderful business, but at these heights, it’s hardly a wonderful stock. After all, it is likely that you’re paying for many years’ worth of growth right off the bat!

Foolish takeaway on Shopify stock after its incredible pop

Shopify stock may have defied the laws of gravity for extended periods. But there have also been many instances when the stock plunged violently, leaving those that got in too late holding the bag.

With shares currently trading at well north of 40 times sales, Shopify stock looks way overdue for another big plunge (possibly back to the 20-30 times sales range). As such, I’d encourage investors to take a bit of profit off the table so they can buy back at lower multiples should Shopify be on the verge of becoming a victim of its own success.

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.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

More on Tech Stocks