Shopify (TSX: SHOP) stock rode the Santa Claus rally, growing 180% from its October 2023 low of around $37 to over $106 now. It is not possible to buy the stock at its bottom every time. But if you caught up early to the rally and purchased the stock at around $50, you earned a +100% return. However, the stock gave everything it had to reach this level. It is now trading 14 times its sales per share and 782 times its earnings per share. Does it mean Shopify’s stock is overvalued?
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Is Shopify stock overvalued?
The valuation of a stock determines how much you are paying per stock for its fundamentals. If a company issues new shares every time to raise capital, the value of a share is diluted, thereby making it overvalued. Lightspeed Commerce raised equity capital during the pandemic to fund acquisitions, thereby diluting per-share value.
Another way to look at the stock’s value is if the hype around the stock has inflated the stock price, leaving little room for growth. Something that has happened with Shopify. It reported its first net profit of $132 million in 2023 after the windfall gains of the pandemic. This profit showed that the company is focusing on streamlining its business structure and making it profitable.
However, 782 times price-to-earnings (P/E) ratio is high. If you consider the 2024 earnings per share expectation, the stock is trading at a 78.7 times forward P/E ratio. The market has priced in 2024’s profitability expectations as well.
Why am I bearish on Shopify stock?
Economists are expecting a mild recession by mid-2024. Also, the first quarter is seasonally weak for Shopify. Moreover, its rivals Nuvei and Lightspeed Commerce are considering a potential private equity buyout. While Nuvei is in advanced talks with private equity firm Advent International, Lightspeed is mulling the potential of going private.
It is difficult to say how the new privatization frenzy will work out for Shopify and other e-commerce stocks. Will it attract Nuvei and Lightspeed investors to Shopify or make them wait and watch to see the normalization of the e-commerce sector?
These unstoppable stocks are better buys today
Instead of buying a stock surrounded by uncertainty at its high, consider buying a stock at its low that has growth opportunities.
BlackBerry stock
BlackBerry (TSX: BB) stock has never traded below $4 in 20 years, even after Apple stole its mobile phone thunder in 2007, the pandemic, or the 2022 tech meltdown. It would be wrong to say that BlackBerry has no challenges. It has been waiting a long time to unlock the $640 million in QNX royalty revenue once the cars go into production. Also, it is waiting for the cybersecurity business to earn some attractive deals.
The company’s new chief executive officer has been restructuring the business to make it profitable. It means more wait time. While the management has shown no interest in privatizing the company, it won’t be shocking to see BlackBerry consider a buyout if the deal is lucrative. Its biggest shareholder Fairfax Holdings is waiting for its investment in BlackBerry to give returns. Unlocking royalty revenue, reporting positive cash flow, revenue growth, or even an acquisition offer could trigger a rally for this stock.
AMD stock
Advanced Micro Devices (NASDAQ: AMD) is an unstoppable growth stock, given its position in the semiconductor industry. AMD has competitive central, graphic, and data processing units. Together, they form an end-to-end chip solution for artificial intelligence (AI) infrastructure. AMD is the only worthy competitor to Nvidia and Intel in data centres, cloud networking, and PC and embedded chips. The stock is a buy-and-hold stock for another 10 years as it enjoys the secular trends of AI and 5G.
Even though the stock is valued on the higher end at 53 times its forward earnings, the AI boom could give it exponential growth.
Final thoughts
When investing in growth stocks, valuations alone are not enough. You should also look at secular trends. A stock in secular growth is worth buying even at its high price. Nvidia and AMD are the best examples, which have surpassed their 2021 tech bubble peaks.
