Saying that Shopify (TSX: SHOP)(NYSE:SHOP) is one of the best growth stocks currently trading on the TSX or even one of the best growth stocks that have ever traded on the exchange, would be an understatement. It wouldn’t reflect what kind of a growth “monster” Shopify is, especially after its powerful growth spell in 2020.
But even when the company wasn’t trading at an unprecedented pace, many investors were worried about Shopify’s eventual decline. They believe that Shopify’s stock is grown way too big, and it will crumble under its own weight. No matter how good the company is, and how well positioned it is in the e-commerce sector, it shouldn’t keep growing despite being so over-valued.
The problem with the company’s expectation-defying growth is that it makes many investors uncertain. Should they leave the over-priced growth stock alone and potentially risk adding a millionaire-maker stock in their portfolio? Or should they buy it at its current peak and hope it can grow to a price where no Canadian stock has gone before: Beyond the $2,000 share price. Because if it doesn’t grow that much, it might not be worth the high price.
Is Shopify the most overvalued stock?
There are just two companies on TSX that are trading at a share price higher than $500. One is Constellation Software, which has the highest share price on TSX, and the second is Shopify. But if you see the share price growth pattern of both companies, you will see a stark difference. The CSU was trading at $500 per share in May 2016, and Shopify was at $500 per share in December 2019.
Unlike the other software giant, Shopify grew from $500 to mid-double digits in less than a year. It’s not just unprecedented; it’s unsustainable. The company is propped up almost solely on investor confidence around the stock. While it’s a fundamentally strong company, it’s not nearly strong enough to deserve a four-digit price-tag.
What happens when this sentiment shifts against Shopify? The small tech fall of September was enough to push the share price down by 23%, and it was probably just a temporary scare. A proper, long-drawn fall might push the share price down to three-digits.
Shopify: The millionaire-maker stock
There is no doubt that Shopify is a millionaire-maker stock. More accurately, it was a millionaire-maker stock, but it can be again, once it drops down near its fair valuation. It has shown powerful growth and recovery in the past, and there is little doubt that it might do so again. But if you buy it at its current price of $1,438 per share, you might be disappointed.
To realize just 100% gains, something that several stocks did in this market crash, Shopify will have to grow its share price well over $2,800. Given Shopify’s history, we can say that it’s not impossible, but it’s highly improbable.
Foolish takeaway
Shopify is currently too overpriced for another unnatural growth spurt. So even if it doesn’t go down, it won’t be able to sustain this year’s growth momentum. Buying Shopify at its current price might not be the best use of your money. Because even if it crosses the $2,000 share price mark, the growth will be paltry in comparison to what you can achieve with some underpriced recovery stocks.
