The Motley Fool

Shopify Stock Could Get Even More Expensive

Shopping and e-commerce
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Many pricey tech stocks have been leading the broader markets higher over the past few months. It seems like such a long time ago that investors were fretting over the possibility of quicker rate hikes, as hot inflation data flew in, sending rates of the 10-year Treasury note to flirt with the 2% levels. Indeed, higher rates are a foe of the growthy. Now that the tables have turned and rates are continuing their descent towards 1%, it seems as though everything that was troubling growth investors have now been shrugged off.

Are growth investors letting their guards down as rates settle? Or could the bond market be experiencing the calm before the storm?

Indeed, investors would be wise to acknowledge the inherent uncertainties in this pandemic-plagued environment. The COVID-19 crisis isn’t over yet. And various health experts may be in the camp that thinks the pandemic could take a drastic turn for the worst, as new variants are discovered.

Today, it’s Delta that’s on the minds of investors. Tomorrow, variants of interest like Lambda could startle the markets. On the flip side, the Fed could deliver a shock in its future minutes should it adopt a more hawkish tone, even in the face of continued COVID-19 uncertainties.

Indeed, now is not a good time to be complacent, especially with valuations on the higher end of the range across a slew of high-growth names. While I wouldn’t avoid the broader basket of tech stocks, I would insist on companies that have demonstrated they can continue raising the growth bar.

Growth stocks that could continue their incredible outperformance

Undoubtedly, a name like Shopify (TSX:SHOP)(NYSE:SHOP) seemed almost untouchable in the heat of the panic earlier this year. Higher rates were a serious threat, as too were the diminishing of the e-commerce giant’s pandemic tailwinds. Today, the stock managed to hit new highs.

Yes, lower rates are a huge reason why Shopify stock is no longer in the gutter. But it’s management’s ability to execute that I believe makes the name a great one to hang onto if you can handle extreme price fluctuations.

In due time, Shopify will face an unexpected top-line growth slowdown, as Amazon.com did recently. And the stock will take a hit on the chin. But the company has shown on numerous occasions that it’s capable of recovering at a pretty rapid rate.

Undoubtedly, Shopify stock is anything but cheap at around 50 times sales. But in this kind of market, you’ve got to pay up for growth. With all the COVID-19 variants out there, things could really take a turn for the worst. And in such a scenario, Shopify could see pandemic tailwinds pick up again, and its price-to-sales (P/S) multiple could easily swell back to record levels at just north of 60 times.

The Foolish bottom line

Indeed, Shopify stock seems like a worthy pandemic hedge for any diversified portfolio. The price tag is steep, but I wouldn’t be at all surprised if it became even steeper over the next 18 months. Over the past two years, the magnitude of the sales multiple expansion has been unprecedented, surging from around 15 times sales to around 60 times sales. The room for error is minimal, but if there’s a company that can grow into such a multiple, it’s Shopify!

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 owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify.

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