Shopify (TSX:SHOP) and Lightspeed (TSX:LSPD) stocks are soaring this year. For the year, SHOP is up 71.7% while Lightspeed is up 15.6% since hitting a low in May. Shopify is certainly rallying harder than Lightspeed is, but both stocks are doing well.
This begs the question:
Are these stocks getting overheated?
SHOP and LSPD both trade at nosebleed valuations. They’ve seen their growth slow down. Neither one is profitable (though Shopify has been in the past). Buying these stocks at these prices is a much more difficult decision than buying at last year’s prices was. In this article, I will explore some relevant factors you need to know about in order to determine whether Shopify and Lightspeed stocks are getting overheated.
Why they might be getting overheated
One reason to think that Shopify and Lightspeed stocks are getting overheated is that both stocks are expensive. At today’s prices, SHOP trades at:
- 13.3 times sales.
- 198 times the best estimate of next year’s earnings.
- 9 times book value.
- 146 times the best estimate of next year’s operating cash flows.
Lightspeed for its part trades at:
- 206 times the best estimate of next year’s earnings.
- 3 times sales.
- 0.9 times book value.
- 27.5 times the best estimate of next year’s operating cash flows.
Lightspeed stock is not as expensive as Shopify stock is. In fact, its book value multiple is downright low! However, it is far further from profitability than SHOP is, with massively negative margins. Viewed in terms of earnings potential, both SHOP and LSPD are expensive.
Reasons for optimism
Despite both stocks being expensive, there are reasons for optimism toward both stocks.
In Shopify’s case, we have the company’s investments in generative artificial intelligence (AI). AI is a popular topic these days, as people are very impressed with the results it can produce. OpenAI’s ChatGPT became the fastest-growing app in history when it reached 200 million users in just a few weeks. Since then, investors have been throwing money at any tech company that has AI capabilities. Shopify, which has an AI tool that lets users generate product descriptions effortlessly, certainly seems to fit that description.
In Lightspeed’s case, the cause for optimism is the fact that the company still has excellent growth. In its most recent quarter, LSPD’s revenue growth was 33%, which was much better than Shopify’s in the same period. If Lightspeed can keep up this growth while keeping expenses under control, then it may turn the corner on profitability. If that’s the case, then we’d expect its stock to do well.
Foolish takeaway
As we’ve seen, both Shopify and Lightspeed stocks have their pros and cons. Shopify is nearly profitable, but is very expensive. Lightspeed is still losing money, but is somewhat less expensive. Both stocks have been caught up in this year’s AI-fuelled tech stock rally. Given that this year’s rally in tech stocks has little to do with fundamentals, I wouldn’t expect it to last. Nevertheless, SHOP and LSPD could be good buys the next time they dip.
