Tread carefully with Shopify, this portfolio manager says

When it comes to Canadian tech favourite Shopify Inc. (TSX, NYSE:SHOP), investors need to remember that it is a momentum stock, says Jim Huang, president and portfolio manager at TIP Wealth Manager.

Cloud-based e-commerce platform Shopify will be reporting its second quarter 2018 financials on August 1, with investors hoping there won’t be a repeat of three months ago, when the stock tumbled five per cent following its Q1 report.

Although Shopify came up with better-than-expected results for the quarter ended March 31 -posting a loss of $0.16 per share and revenues of $214 million, up a full 68 per cent year over year and beating the consensus estimate of $202 million (All figures in US dollars)— its sales momentum showed signs of slowing. In 2016, sales grew by 90 per cent, in 2017 they grew by 73 per cent, and for 2018, management predicted year-over-year growth of 50 per cent.

The company has been the target of short-seller criticism over the past year, as well, which has temporarily halted the stock’s progress.

But so far, SHOP has shown a knack for pushing through the pullbacks, selloffs and critiques, with the stock hitting a record high of $175.11 on June 20. Those ups and downs are par for the course with a momentum stock like SHOP, says Huang.

“It’s one of those things where you’ve got to have faith and you have to watch the execution closely,” Huang told BNN Bloomberg Thursday. “If they do have a small stumble, which we saw over the last couple of quarters, then you see the stock price come down. It’s a momentum stock. They’ve done very well, but you want to make sure that the momentum continues for staying with them.”

Huang says that Shopify has clearly been successful in terms of execution. The company’s platform is pushing towards becoming a one-stop shop for small- and medium-sized businesses.

“I wish I could see the long term,” he says. “They’re still not making money from an accounting sense. They are, however, break even on a cash flow sense, so that’s great.”

“If they are successful in penetrating the business globally and hopefully at some point making a decent amount of money, then the 200x P/E is probably justified,” says Huang.