Don’t be afraid to nibble on shares of great growth companies, even if the price-to-earnings (P/E) multiple is a tad on the high side of the range. Undoubtedly, buying stocks high with the hope of selling higher could certainly cause one to play the game of greater fools (based on the greater fool theory; note the lower-case “f”).
However, if you’re done with the homework and believe that the current valuation doesn’t account for a pick-up in earnings growth way down the line, perhaps you could be looking at a growth firm that can outgrow its multiple.
Indeed, some degree of multiple expansion is to be expected ahead of such expected compression. But the extent of which is unknown. In any case, the emphasis should be on evaluating the growth narrative and projecting at what level of certainty a firm will be able to actually pull in the profits. It’s one thing to have a great growth story, but it’s another thing entirely to have the execution to make that story come to life.
In today’s market, the big question is whether or not all this AI investment (some of the spending from the Mag Seven is getting a tad out of hand, in my opinion) is going to enrich companies (higher sales and margins) at a rate that’s acceptable to investors.
Indeed, if all this spending yields a minuscule return, you can bet that investors won’t be happy and they’ll be more willing to hit the sell button, sparking some sort of market correction or perhaps a mini-burst of a very small bubble. Personally, I don’t think AI has reached full-blown bubble territory. Rather, I think there’s some overvaluation and overhype that could certainly pave the way for a mild bear market akin to the one endured in 2022.
Shopify
First up, we have Shopify (TSX:SHOP), a stock that’s coming in after its latest blowout quarter sparked a massive rally to above $200 per share. In a prior piece, I went into greater detail on the magnificent quarter which, I thought, put the firm in the class of the Mag Seven tech stocks. Now at $193 and change, I think it’s time to start doing some buying, especially with all the great things management is doing with generative AI. Furthermore, I think acquisitions could help Shopify pull further ahead with its AI roadmap as it looks to accelerate the value it’s providing to merchants.
The company recently acquired Molly Studio, which could help Shopify elevate its design capabilities. AI and design, I think, are the perfect match.
Indeed, Shopify already has so much talent on its AI and design teams. This latest acquisition, I think, brings aboard even more expertise to help the firm really capitalize on the AI revolution, perhaps in a more profitable way than the large language model (LLM) makers themselves. At the end of the day, I like how Shopify is going about using AI and think it’ll translate to real earnings growth over the next three years.
SHOP shares: Pricey, but cheap at the same time?
As for the LLM makers themselves, I can’t say I have the confidence to call whether big spending will pay off or not. Either way, I view SHOP stock as cheap, but expensive-looking based on its 77.5 times trailing price-to-earnings (P/E) multiple. Indeed, the stock has looked pricey, but it has proven cheap, even when commanding such hefty multiples. That’s the power of wonderful growth stories led by top-tier managers. Shopify’s top bosses not only know AI, they know how to apply it effectively. That’s a real differentiator.
In my view, it’s less about which AI models are being used, but how such intelligence is being used that will determine the winners and losers of the next stage of the AI race. At this juncture, Shopify stands out as a clear winner and one that’s well worth a high P/E.
