Shopify stock is just too risky, Jim Huang says

Ottawa e-commerce company Shopify (Shopify Stock Quote, Chart, News: TSX:SHOP, NYSE:SHOP) may be the darling of Canada’s tech scene, but its sky-high valuation makes it just too risky for your hard-earned investment dollars, says Jim Huang, President and Portfolio Manager at TIP Wealth Manager.

Shopify has made headlines this week for a couple of reasons, one being a new deal with Google, whose Alphabet Inc. cloud service will now host Shopify’s online stores. The agreement will see Shopify using Google’s data centre and back-end infrastructure, which will help the company, says Shopify’s senior vice-president of engineering Jean-Michel Lemieux.

“Google has the strength to help Shopify scale our infrastructure globally and we can spend our time on the commerce stuff,” Lemieux said.

But instead of receiving a boost from the Google news, shares in SHOP fell on Monday in large part due to another negative report from short-seller Andrew Left, whose Citron Research last fall accused Shopify of promoting a get-rich-quick scheme. This time, Left alleges that Shopify is too reliant on Facebook as a business channel and that as Facebook continues to battle controversy over privacy concerns, Shopify’s own future is thus in doubt.

“It cannot be disputed that tighter Facebook restrictions on access to privacy and pixels will annihilate the already fragile and dodgy business of the Shopify Entrepreneurs,” says Left.

CEO Tobi Lütke has since responded, denying the tight link between Facebook and Shopify.

“Our 600,000+ entrepreneurs can sell on any channel they want to. If their customers want to buy via carrier pigeon, we’ll build a channel for that too. The health of any individual channel has little effect on the overall platform. Demand migrates,” said Lütke on Twitter.

And while Huang agrees that Shopify has a solid position within e-commerce, the stock is too pricey and the company’s future too uncertain for a buy-in at its current valuation.

“I don’t think there’s any doubt as to the growth potential and the leading position in [Shopify’s] business,” says Huang in conversation with BNN. “The issue is when trading at 1,600 times P/E, you’re basically incorporating a lot of the future into the present so that if that prospect changes even just a little bit, it has a huge impact on the stock price.”

“It’s not something I would buy, but if you’re lucky enough to be in early, I wouldn’t suggest you sell either because things could happen,” he said.

Huang contends that while the tech world has its successes, it’s still difficult to pick the winners.

“We’re all rooting for it [in Canada],” he says. “We want something that’s real and that will grow, but it also reminds me that everybody is talking about tech, about Google and Facebook, Amazon, the success stories, but for every one of those, you probably have a hundred others who never succeed. So, you’ve got to be careful with that kind of investing.”