Wait for a pullback on Shopify, this portfolio manager says

Already trading at absurdly high levels, the e-commerce company’s share price keeps climbing higher — as does its top line, which grew by a whopping 50 per cent in its last quarter. Jumping in even at these prices is tempting, says portfolio manager Rick Stuchberry, who argues that even though Canada’s investment environment is tilted in SHOP’s favour, you should probably resist the urge and look instead to cheaper tech plays in the US.

“We owned it and sold it. It was a triple or something, a really good sale. But the thing kept going,” says Stuchberry of Wellington Altus Private Wealth to BNN Bloomberg on Monday. “What happens to a stock like this is —now remember, this is a Canadian darling— that as it moves up in market cap, the ETFs, if they have a Shopify in their basket, they have to continue to buy the thing. They’re adding to their positions just to maintain their weightings.”

“It’s a self-fulfilling prophecy,” he says.

Currently one of the hottest stocks not just in Canada but in US markets as well, Shopify is now up 89 per cent year-to-date. That’s after finishing 2018 up almost 50 per cent, a year in which the tech sector in general performed poorly.

SHOP has surged higher over the past week, buoyed by the market’s response to its first quarter earnings, delivered on April 30. Revenue for the quarter jumped to $320.5 million, compared to $214.3 million a year earlier and besting analysts’ expectations of $309.4 million. (All figures in US dollars.) At the same time, the company posted a net loss of $24.2 million, which was higher than last year’s Q1 loss of $15.9 million. Also notable was the guidance from management, which upped its fiscal 2019 adjusted operating income from the $10-million to $20-million range to the $20-million to $30-million range.

“The company has done very well, doing everything they said they were going to do. And it is a stock in the Canadian portfolios that the managers really have to buy if you’re running an index in Canada,” says Stuchberry.

“This thing is going up and up as opposed to the banks which are going sideways,” he says.

Stuchberry argues that emerging competition may become a factor for Shopify and that a a buyout from a larger tech company looking to take on e-commerce processing is also a possibility.

“On the valuation model, we’ve been looking for the big pullback and we haven’t had it. So what we’ve done is redeployed into technology in the United States,” he says. “Because there are so few names in Canada, they’re always trading at a pretty reasonable premium to what you can get in other markets. Almost all of our technology now is in the US where we think it’s cheaper on a relative basis because of this ETF model.”