I’m not going to sugarcoat it: I think we could be in for some pain ahead. Concerns around the absolute level of spending on current mega trends such as artificial intelligence (AI) are rising, and investors are quickly catching on to the fact that equities are now valued at levels they’ve only been at during the peak of past bubbles.
Accordingly, investing in growth stocks, even the highest-rated blue-chip names in the tech sector, is starting to look like a very difficult task; at least, in relation to the decision facing investors in years past.
With that said, I still think Shopify (TSX:SHOP) is one of the best high-growth options in the market right now for those looking to stay invested over the long term.
Here’s why.
E-commerce growth isn’t the catalyst it once was
Right now, most tech investors are almost squarely focused on AI, machine learning, and a plethora of other growth catalysts in this sector. That’s fair, considering the sheer amount of investment and excitement around these new technologies.
Accordingly, I’d argue that a number of other top-tier secular growth trends are being ignored. One such trend I’ve long thought should provide very consistent top- and bottom-line growth over time is that of the e-commerce sector.
Within this space, Shopify’s core e-commerce platform powers a significant chunk of economic activity. With companies of all sizes looking to expand their online presences and reach customers directly, Shopify will likely remain the go-to fully-integrated platform these companies will lean on over time.
I think investors have started to recognize once again what they saw in the pandemic era — this shift is one that’s still underway, and as strong as ever.
Valuations matter, and Shopify’s valuation isn’t insane
Many investors may look at a forward price-to-earnings ratio of around 80 times as very expensive. And it is.
However, on a historical basis, this valuation represents one of the cheapest levels this stock has traded at, really, since its 2022 lows.
With an impressive 32% overall revenue and gross merchandise volume growth this past quarter, I’d argue this multiple makes sense from the perspective of an investor who is considering holding this stock for three or more years. In three years’ time, this stock should be valued at roughly 34 times earnings, holding this revenue growth rate steady.
So, if Shopify is able to ramp up its growth rate, and/or see its margins expand and its earnings grow faster than its top line (my base case), this is a stock that could be valued at a much lower multiple than some of the other top Magnificent Seven names in the market.
That’s an attractive bull thesis, and my current view on Shopify. This stock still looks like a screaming buy for those who can handle some volatility ahead.
