Forget Shopify: 1 Tech Stock to Buy Instead

Shopify stock’s lofty valuation reflects overly optimistic expectations and makes CGI a better tech stock to buy today.

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Shopify (TSX:SHOP) has taken the tech world by storm in the last few years, as the company has permanently altered the e-commerce world for the better. But while there’s still room to grow and move higher, is Shopify stock the best tech stock to buy today?

Let’s look into this.

Shopify stock trading at a lofty valuation

There’s no doubt that Shopify stock has been reflecting really high expectations. While there are many good reasons for this, it seems to have crossed into overvalued territory. Trading at 100 times this year’s expected earnings, we have to consider that maybe valuations have gotten ahead of fundamentals.

In fact, there are signs that they have. In Shopify’s latest quarter, the company beat expectations, with earnings per share (EPS) of $0.34 versus expectations that were calling for EPS of $0.31. Yet, Shopify’s stock price fell quite sharply by 14%, signalling that the stock has very high expectations built into it.

Despite the fact that Shopify is posting very healthy financial results, Shopify’s stock price seems to be due for a breather.

Opt for CGI over Shopify

Tech stocks like Shopify have outshone the rest in the last few years. This is not surprising, as Shopify has grown rapidly, with its revenue increasing 350% to $7 billion in the last five years. During this same time period, Shopify stock increased 260%. Over this same time period, CGI Inc. (TSX:GIB), has seen its annual revenue increase 18% to $14 billion. Its stock price has increased 57%.

The fundamentals and valuation of each of these tech stocks highlight why CGI stock is, in fact, the tech stock to buy. Now, let’s look at CGI. CGI’s EPS is expected to grow 9% in the next two years.  Also, its margins are strong. In fact, the company achieved an earnings before interest and taxes (EBIT) margin of 15% in its latest quarter. Finally, CGI’s return on equity (ROE) is high, at 20%.

In terms of valuation, CGI is very reasonably valued, even undervalued, in the long term. Growth rates are high, as the company is benefitting from strong demand for its solutions and services. It’s clear that companies and governments are in a race to reap the benefits that digitization brings. And CGI is ready and able to meet this demand. As CGI continues to consolidate the still fragmented IT services market, the stock is likely to continue to do well.

What about Shopify?

As for Shopify, its growth rate is clearly higher. In fact, Shopify’s EPS is expected to grow 40% this year and 30% next year. While this is higher than the 9% growth rate that’s expected for CGI, it comes at a cost — Shopify stock is trading at an expensive 100 times earnings. CGI, however, is trading at a very inexpensive 19 times earnings.

The bottom line

Shopify and CGI are obviously two different types of tech stocks. Shopify is a relatively new company that’s in the earlier stages of its growth. This comes with added risks, uncertainties, and volatility but also explosive potential upside, which we have already seen. In contrast, CGI is a very well-established company whose business is very well-entrenched and relatively secure. As a result, CGI stock is significantly less volatile.

In my view, CGI stock is well worth considering as an alternative to investing in the volatile and very richly valued Shopify stock.

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.

Fool contributor Karen Thomas has a position in CGI. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends CGI. The Motley Fool has a disclosure policy.

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