Shopify (TSX:SHOP)(NYSE:SHOP) continued to defy the laws of gravity in 2020, as pandemic tailwinds led the stock to new heights, outperforming its bigger brother in the e-commerce space, Amazon.com, by a wide margin. With Shopify stock recently breaking above its multi-month channel of consolidation, I think investors should expect more of the same from the firm I like to refer to as the Canadian Amazon, with the looming economic reopening.
Now, there’s no denying that Shopify stock is ridiculously expensive. At around 60 times sales (that’s sales, not earnings, folks!), shares will probably never trade at levels that would appease the value crowd. That said, investors and analysts continue to expect a profound magnitude of sales growth over the coming years, which could potentially justify SHOP stock’s nosebleed-level valuation.
Analysts have been chasing this stock in recent years, hiking their price targets after the fact. And although some skeptics expect Shopify stock to take a breather in the post-COVID environment, I think the firm is in a good spot to continue building upon its momentum from 2020.
Don’t expect e-commerce titans to plunge as pandemic tailwinds fade
In my opinion, the pandemic has pulled accelerated the rise of e-commerce by many years. This phenomenon could justify paying-up for many years’ worth of growth with SHOP stock upfront.
Many small- and medium-sized businesses (SMBs) that were reluctant to try out Shopify before the pandemic were forced to enter the realm of the digital or run the risk of being left behind amid COVID-induced lockdowns. Shopify was viewed as a critical lifeline amid the pandemic, and it won many new clients, many of whom, I believe, will remain customers of Shopify for life. Heck, some merchants may decide to ditch their pricy reopening plans altogether if their digital stores are thriving.
With a world of upselling opportunities that could fuel a sustained move into the green at some point over the next few years, there’s still a chance that Shopify stock could more than justify its ridiculously high multiple under the leadership of its legendary founder Tobias Lütke. The stakes are as high as they’ve ever been, but it’s a mistake to bet against Lütke.
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Should buy Shopify stock in spite of the ridiculously high price tag?
Shopify stock is not for the faint of heart.
Sooner or later, the firm will fail to pole-vault over the bar that analysts set for any given quarter. Like with Amazon.com stock, though, I suspect very smart investors will be backing up the truck on any such dips, given the powerful long-term growth profile. Even after the pandemic, the SMB market remains modestly penetrated. With many small firms that are likely to go online over the coming decade, it’d be unwise to count Shopify out, as it looks to help small firms compete with the behemoths in the realm of the digital.
Could Shopify make a run for $3,000 this year?
I wouldn’t be surprised if it did. That said, I think it’d be a wiser move for investors to wait for a better entry point before backing up the truck on shares. I think a market-wide correction could be in the cards in the first half of 2021, and I suspect Shopify stock will not be spared from such a sell-off. Should the correction kick in, that’s when I’d look to pounce on Shopify shares before its next leg higher.
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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 Joey Frenette 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: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon.