Facedrive vs. Shopify: Hype vs. Quality

Facedrive (TSXV:FD) is one of those meme stocks that has run to absolutely ridiculous levels and is poised for some serious retracement.

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Meme stocks have been a rage this year, with companies like GameStop and AMC tempting amateur investors with short-term, high-growth opportunities. However, there are story stocks, like Facedrive (TSXV:FD), that are getting bid up to levels that clearly defy logic. When a company with annual revenue encompassing $1 million has a valuation of around $2.8 billion, it’s a case in point.

I genuinely feel that these are really worrying times, as the qualms of missing out on high-growth opportunities have thrown fundamental analysis out of the window. As more and more investors jump on the bandwagon, it appears most of them are poised for a brutal fall.

I strongly feel that FD is the biggest short opportunity right now in the market today. Accordingly, investors who are not willing to short-sell this stock should steer clear of this falling knife.

Facedrive’s business model lacks originality

The company has a straightforward business model. It engages in the provision of a ride-sharing platform that primarily focuses on EV options. If one goes into the specifics, this application allows driver reviews, cleaner transport, etc. Indeed, this is quite similar to some of the other popular options out there, like Lyft and Uber.

Precisely, this small-cap company is aiming to become the next Uber or Lyft. But then, what’s original about it?

EV exposure appears to easily entice retail investors

Facedrive’s acquisition of Steer last year seems to be one of the main factors why retail investors bought this stock. Sadly, it’s just a merger of two micro-cap companies that have joined forces with an aim to form a winning combination. Unfortunately, when two companies with quarterly losses collaborate with each other, it’s not likely to succeed. At least, that’s what I believe.

In Q3 2020, FD’s earnings report represented a 36% year-over-year increase in the company’s revenue, whereas operating expenses increased by 186%. The numbers suggest that the company is in a high-growth phase, and that explains its expenses.

In most cases, such high-growth software companies are acquired during these stages, as they are unable to bear the extortionate expenses and gain market share. Hence, this is an extremely high-risk investment until the company gains some market share.

Another stock to consider

For those looking for high-quality growth, there’s no better option right now on the TSX than Shopify (TSX:SHOP)(NYSE:SHOP).

Unlike Facedrive, Shopify is a proven growth gem. The company’s seeking to become permanently profitable — a reality that won’t be the case for years for Facedrive investors.

This company’s e-commerce platform has produced absolutely astronomical growth through these difficult times. The pandemic initially led to concerns about a market crash, which have been assuaged due to a surge in e-commerce activations that are tied to pandemic-related lockdowns.

Shopify’s growth rate may slow somewhat as the economy reopens. However, over the long term, this company is well positioned to continue its incredible ascent.

For those seeking growth, I would recommend investors look to quality right now over hype.

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 Chris MacDonald has no position in any of the stocks mentioned. David Gardner owns shares of GameStop. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool recommends Uber Technologies.

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