The tech sector performed exceptionally well during the pandemic-driven market crash, and few stocks, even within the best-performing sector, did as well as Shopify (TSX:SHOP)(NYSE:SHOP). Shopify also became the most massive security trading on the TSX, leaving behind the banking giant, and TSX’s prevalent leader, Royal Bank of Canada.
The exceptional growth streak propelled Shopify, which was trading in the mid-three digits, over 900 points up at its peak. This kind of growth, even if not unheard of, is undoubtedly very rare, and the people who bought Shopify at the right time this year would have seen amazing growth in their portfolios.
If you had bought Shopify at the start of the year and invested $10,000 in the company on January 1, you would now be sitting at $24,950. That’s almost a 150% growth in eight months, and it’s not even the best one Shopify offered this year. If you bought into the company when it was trading at $500 (Mar 17th), and sold it at its yearly peak price of $1,453 per share earlier this month, your $10,000 would have almost tripled ($29,000) in value.
And that’s in just in about four and a half months. Investors wait around decades for that kind of growth with conservative picks, and Shopify is anything but conservative. With this level of growth, it’s not surprising to see how oversold Shopify has become. The current price to earnings is almost 300 times, and the price to books is at 25.9 times.
The latest quarterly earnings proved that the company isn’t just propped up on investors’ hope. Compared to the second quarter last year, the company doubled its revenues, mostly from its merchant solutions activities. Subscriptions-solutions driven revenues increased at a modest pace. Gross profits also saw a decent 83% growth. And for the first time in several quarters, Shopify saw income from operations, rather than the usual loss.
Is this growth sustainable?
That’s the million-dollar question for so many investors. Whenever people think the company is oversold, it overshoots expectations and makes its investors richer. At the start of this year, when the company was trading around $500 per share, it was still an overvalued stock. Right now, it might be an overly overvalued stock. The sales and earnings numbers are way behind its valuation, and they might take years to catch up.
Shopify didn’t have any serious competitors, until now. But now BigCommerce is here with the potential to rival Shopify, maybe not right off the bat, but in a few years. And even if it doesn’t snatch away Shopify’s top position in that particular tier of e-commerce, it might prevent Shopify from becoming the next Amazon.
If you are wondering whether you should buy Shopify, the answer is not that simple. While it’s true that the stock might still have a lot of growth left, it might not be a good time to buy Shopify. Despite robust metrics, it’s still oversold, and inflated far too much thanks to investor confidence. You can look into it when it normalizes again.
Speaking of the Shopify...
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Adam Othman owns shares of Shopify. 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: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon.