Shopify stock is still overvalued, this portfolio manager says

Shopify (Shopify Stock Quote, Chart TSX, NYSE:SHOP) shares have fallen off sharply this month but investors looking for a bargain should think again, says portfolio manager Andrew Pink, who argues that even at these reduced prices SHOP is still overvalued.

Like the rest of the tech stocks both north and south of the border, Shopify is being hit hard by the October blues, now down 31 per cent from its mid-June high and having surrendered most of the ground it gained in 2018. Ahead of the company’s third quarter earnings report due on Thursday, SHOP dropped almost eight per cent in Wednesday trading.

But the stock has shown marked resiliency over the past year, most notably in response to a number of short-seller attacks which caused sizeable share price dips that SHOP was able to overcome.

And while it’s easy to root for the plucky e-commerce company — one in a handful of bright lights in the Canadian tech sector — there’s no getting around the high valuation, says Pink, portfolio manager at LDIC Inc.

“I really like the story and I love what they’re doing,” says Pink to BNN Bloomberg. “I love the idea that they’ve got this massive list of companies where they can do the e-commerce platform for virtually any business. It’s just an amazing story. The problem is that it trades at seven times next year’s revenue.”

“I have a really hard time because, why doesn’t it just trade at four times or two times revenue — when you’re talking about multiples of revenue, it’s very difficult to look at that in relation to any kind of metric,” he says. “I think that they’re just barely EBITDA-positive. Really, the valuation is extremely stretched.”

Last quarter, Shopify posted a consensus beat on revenue at US$245.0 million, a 61.5 per cent year-over-year growth, as well as a beat on earnings which came in at US$0.02 per share, compared to a loss of US$0.01 per share a year earlier. The company reported revenue from its Subscription Solutions segment of $110.7 million, a 55 per cent increase, while its Merchant Solutions segment grew by 68 per cent to $134.2 million. For the third quarter, the company has predicted revenue in the range of US$253 and US$257 million.

“They do have a lot of verticals, they can get into financing, into tax, they can get into all sorts of different verticals,” says Pink. “You roll out a financing platform and all of a sudden that’s extremely accretive for them. So, they’ve got tonnes of opportunities, but we just don’t know how to value it and seven times revenue is a big, big number.”