Shopify is overvalued, this investor says

Ahead of Shopify’s (Shopify Stock Quote, Chart TSX, NYSE:SHOP) third quarter financials due later this month, investors may be wondering what the future holds for both the Canadian e-commerce company and its share price, which has dropped once again below the C$200 mark, falling well off the C$232 high reached back in June. Time to buy it on the dip?

That’s a tricky call, says Rob Lauzon of Middlefield Capital Corporation, who thinks SHOP still looks overvalued.

“These are tough stocks to buy when they don’t have earnings now and cash flow now to backstop the valuation that we’re all used to putting on stocks,” says Lauzon, Managing Director and Deputy Chief Investment Officer at Middlefield, to BNN Bloomberg . “You have to believe in the continued growth and the conversion of scale to cash flow and earnings.”

“Typically I’m more of a value manager. I like to buy stocks that are cheap based on earnings visibility that I’m really confident on for the next year,” he says.

Shopify came up with strong numbers in its last earnings report in July, posting revenue of $245 million for the quarter ended June 30, 2018, higher than both the consensus estimate of $234 million and the high end of management’s guidance. That was paired with an earnings per share of $0.02 which was better than the expected loss of $0.03 per share. (All figures in US dollars unless otherwise noted.)

But investors reacted negatively to a slowdown in growth, exemplified by the company’s gross merchandise volume (GMV) which grew by a healthy 56 per cent over Q2 but was actually down from the 64 per cent growth in Q1 and lower still than the 74 per cent GMV growth during 2017’s Q2.

As a result, the stock dropped 13 per cent and while SHOP fared better over September, it has now dipped below C$200.00 again.

That’s still too pricey, says Lauzon.

“We don’t own it currently,” says Lauzon. “We’re really scrubbing it hard for our e-commerce fund but we still feel that it’s a bit overvalued.”

“They’re doing a great job with their business model of helping small business get quickly online and up and running and managing the back office for them. It’s just expensive trading on where you think this stock will be three to five years from now,” he says.