Microsoft is a real threat to Shopify, this portfolio manager says

Shopify (Shopify Stock Quote, Chart TSX:SHOP) has been on fire this year, which is great for shareholders but less so for those of us hoping to get in on the stock. Don’t bother, says Chris Stuchberry of Wellington-Altus Private Wealth, who argues that SHOP is just too expensive now.

“We were big on Shopify earlier on. We were in and out from $40 to over $100. It was one of our best stocks in the last five years. That said, it is now very expensive,” Stuchberry, portfolio manager at Wellington-Altus, told BNN Bloomberg on Tuesday.

“When you buy some of these growth stocks, you buy them on multiples of sales and it’s okay to buy a company at 3x sales then watch the sales go up and sell it at 10x sales. That’s good trading. But now you’re in a multiple of 20x-plus of sales, you’re very high,” he says.

Shopify’s share price dropped two per cent on Tuesday as investors reacted to news that Microsoft is looking to create its own software tools for e-commerce, in direct competition with Shopify. Other companies are edging into the space, as well, such as Facebook whose new Instagram feature Checkout allows users to shop on the platform.

Shopify’s share price is up 42 per cent year-to-date, while over the past 12 months, the stock has gained 70 per cent.

Stuchberry says that Shopify’s high market cap makes it a less likely acquisition target.

“Some people might justify [the high valuation] by saying, ‘Okay, they could get taken out,’ or something,” he says. “But I just don’t see a world where Amazon which trades at two or three times sales will pay 30x for Shopify. I think that that argument might be a bit null and void.”

“I think that they have to grow into these numbers. Since we owned the stock, the growth has slowed a tiny bit — obviously, economies of scale and so on,” he says. “Although I do think that it continues to grow, it’s very difficult for us to look at purchasing at these levels.”

Stuchberry also thinks that the competition threat from the likes of Microsoft poses a real risk.

“Shopify’s market cap is C$30 billion and Microsoft does US$130 billion of cash. That’s formidable,” he says.