Shopify (TSX:SHOP) stock is rallying hard this year. Up 71% since markets opened in January, it has handily outperformed the TSX index. If you’d invested $10,000 in SHOP at the start of the year, and held to today, you’d already be sitting on $7,000 in gains.
It’s been a great result, but can it continue? Shopify is a notoriously expensive stock, trading at 13.4 times sales, with no profits. There are real risks when investing in a pricey technology stock like this one. In this article, I will explore the topic of whether Shopify stock is a good buy at today’s prices.
Excellent growth
One thing that Shopify stock undeniably has going for it is growth.
In its most recent quarter, SHOP delivered the following growth metrics:
- $1.51 billion in revenue, up 26%.
- $49.6 billion in gross merchandise volume, up 15%.
- $1.1 billion in merchant solutions revenue, up 31%.
- $27.5 billion in gross payments volume, up 56%.
As you can see, SHOP has excellent growth in revenue and payments processed. If you aren’t familiar, the terms “gross merchandise volume” and “gross payments volume” refer to shipments and payments processed by Shopify. These aren’t sums collected by the company, but they do predict future revenue, so it’s nice to see that they are healthy.
Almost profitable
Another thing that Shopify has going for it right now is the fact that it is nearly profitable. To continue with summarizing the recent earnings release in the first quarter (Q1), Shopify delivered the following:
- $717 million in gross profit, up 12%
- A -$31 million adjusted operating loss, which equals 2% of revenue
- $86 million in free cash flow
- $0.05 in earnings per share (EPS), up from a -$1.17 loss
As these figures show, Shopify was arguably profitable in Q1. Net income and free cash flow were both positive and improved from the same period last year. Operating income was not positive but was close. Overall, it was a good quarter.
Alarming valuation
Now, for the one big drawback to investing in Shopify stock at today’s prices:
It’s very expensive.
At today’s stock price, SHOP is trading at the following:
- 146 times the best estimate of the next 12 months’ earnings
- 13.4 times sales
- 10.84 times book value
- 148 times the best estimate of next year’s operating cash flow
It’s very pricey. To put it in perspective, Shopify would need to pay you its next 13.4 years’ worth of revenue per share to pay you back the amount you invest in its stock today; that’s not earnings — just revenue! That’s an awfully rich valuation.
But then again, Shopify is also growing quickly. With 26% revenue growth, it will catch up with its current valuation at a rapid pace if the stock price does not move. As for whether the stock price will move, it’s anybody’s guess. The big takeaway is that SHOP stock needs to grow a lot in order to be worth the investment at today’s prices. Perhaps a small position in a diversified portfolio would make sense, but this isn’t the kind of stock you’d “go all-in” on.
