Shopify (TSX:SHOP) stock has been one of the TSX’s top gainers in 2023. According to a list compiled by the Globe and Mail, it is in the top 50 gainers of the year. That’s an impressive feat when you consider that the TSX Composite Index has more than 250 individual stocks. Among its peers, Shopify is in the upper percentiles of performance.
That in itself does not mean that Shopify is a buy. As Warren Buffett says, “past history isn’t all there is to the game.” Very often, investors who buy stocks after they go up, get disappointed when they discovered that they bought the “top.” It may seem obvious, but some people forget it: it’s future results, not past results, that you make money off of. With that in mind, is Shopify stock a buy following its impressive 2023 rally?
Shopify stock: The pros
Shopify stock has two main things going for it right now:
- Growth
- Valuable users
Shopify’s growth is easy enough to explain. In its most recent quarter, the company grew its revenue at 26%, which is an above-average growth rate. It also grew its gross profit at 11%, which is an “OK” rate. Unfortunately, the growth in other profits was not as good: operating income and net income both swung from profits to losses. It was a mixed picture, but the top-line growth points to the possibility of future profits if SHOP’s management can exercise financial discipline.
The point about valuable users is a little more complex, but basically, it has a lot of valuable vendors, like Jeffree Star (a cosmetics seller) and Gymshark (a major gym equipment brand). Vendors like these are multi-million-a-year businesses in their own right: as they grow, Shopify grows. So, there is some potential for Shopify to grow due to the continued success of its celebrity and big-brand vendors without having to spend much money recruiting new ones.
Shopify stock: The cons
Now for a big negative about SHOP stock: it’s very expensive.
At today’s prices, SHOP trades at 10 times sales and seven times book value. That is a very expensive valuation. To put it into perspective, stocks are normally valued at how many times earnings they trade at: earnings is sales minus costs. Price-to-earnings ratios above 20 are usually considered high, especially if interest rates are high.
Investors usually desire price-to-sales ratios below two. For Shopify to be trading at 10 times sales means it’s trading at the same premium to sales that many Canadian banks trade at to actual profit. If a stock costs 10 times earnings, then it takes 10 years for the company to earn in profit what you spent on its stock (assuming no growth). Shopify is at 10 times sales and has no earnings! This is not a deep-value opportunity, to put it mildly.
If you’re going to buy SHOP stock, you should have good reasons to believe its growth will continue. In a 0% growth scenario, SHOP’s juice isn’t worth the squeeze.
Final verdict
Having looked at the pros and cons, I would conclude that Shopify stock is a “so-so” opportunity in 2023. If I were an analyst covering the stock, I’d probably rate it a “hold.” Certainly, it’s growing fast, but it’s expensive and unprofitable. It could merit a place in a diversified portfolio, but it probably doesn’t make a lot of sense as a top holding.
