Like many names in the technology sector, Canadian e-commerce company Shopify (Shopify Stock Quote, Chart TSX:SHOP) has had a good run to start out 2019 — a very good run in SHOP’s case, with the stock now up 69 per cent since December 24.
That puts it in no-go territory, says Teal Linde, president and founder of Linde Equity Inc, who thinks the stock is now overbought.
“Shopify has had a fairly large run-up recently, and I think that this is a stock where the valuation is extremely high,” says Linde to BNN Bloomberg on Monday.
“People argue that it’s not very profitable yet so you should just ignore the price to earnings ratio, because if your profit margin is just a fraction then your P/E is going to be up in the hundreds,” he says. “But if you look at the sales of the company, it’s trading at around 19x trailing sales. So if you assume that Shopify had a ten per cent profit margin, the stock is [still] trading at 190x earnings, so that’s already pretty high.”
Shopify reported its quarterly results last month, showing a 54 per cent year-over-year increase in revenue from $222.8 during Q3 of 2017 to $343.9 million for 2018’s Q3. (All figures in US dollars.) The company lowered its loss from $3 million to $1.5 million while beating analysts’ estimates with an adjusted profit of 20 cents per share, better than the expected 15 cents per share.
Linde argues that it might be best to wait for a pullback, of which the stock has had many. In 2018 alone, SHOP had five declines of 20 per cent or more, while nonetheless finishing the year up 48.5 per cent.
“If you do want to own Shopify, you want to wait for a large dip and then you might consider it. It certainly is a durable business, it’s a strong business. They are sort of the de facto company if you want to set up an e-commerce site for your business,” Linde says.
“The stock just came out with results and upgrades and price targets have risen, and so the stock has had a run. So, now is probably not the time to buy. I’d wait,” he says.