Shopify’s valuation is “crazy” this analyst says

But is the stock too hot? Probably, says research analyst Jamie Murray, but you can still make money if you time your trades well enough.

Like the rest of the tech sector, Shopify had a rough last quarter to 2018 (but still finished the year up 48 per cent) and then came roaring back to life in January. The good times kept rolling as the e-commerce company reported its fourth-quarter financials earlier in February, posting a loss of $1.5 million which was half that of a year prior, to go along with revenue of $343.9 million, up from $222.8 million for Q4/17. Shopify beat analysts’ expectations on earnings, coming in with a profit of $0.26 per share compared to the Street’s $0.20 per share. (All figures in US dollars unless where noted.)

But the sky-high multiple is still hard to get your head around, says Murray, head of research for the Murray Wealth Group, who spoke to BNN Bloomberg Tuesday.

“It’s a crazy valuation on this company. It’s ten or 11x revenue,” Murray says. “We’ve seen many of the great software companies perform like Shopify has since the end of December, some are up 60 or 70 per cent. Very expensive, probably the hottest sector in the market. The multiples are definitely getting to a point where we definitely think that they’re peaking or too high and that it’s going to be hard for them to make a good return from this level.”

“The way to trade Shopify is that you wait for the market to have a moment where everything gets wiped out and you can pick it up for under C$200 and sell it when it gets back up to the C$210, C$220, C$230 range,” he says.

SHOP certainly has its peaks and valleys, as witnessed last year when a pair of short-seller attacks along with investor concern over quarterly growth numbers caused five declines of 20 per cent or more. Each time, however, the stock did a good job of picking itself back up again.

“As companies like Shopify mature, their free cash flow profile increases, and if they can keep a nice free cash flow growth profile and a nice revenue growth profile, the multiples can stay high,” says Murray. “But they are very susceptible to a recession or one bad quarter where the revenue growth doesn’t meet what the analysts are looking for and you can see 20 and 30 per cent declines in stocks like this.”

“So, buy it when there’s fear and blood in the streets and sell it when everything still looks rosy,” he says.