Shopify is now fairly valued, this analyst says

Shopify (Shopify Stock Quote, Chart TSX:SHOP) has posted other-worldly gains so far in 2019 but is there more gas in the tank?

Not likely, says analyst Ken Wong of Guggenheim Partners, who thinks the Canadian e-commerce sensation could make good on all that growth packed into its sky-high share price but at the moment the stock is fully valued.

“I would categorize Shopify as a hyper-growth stock,” said Wong, in conversation with BNN Bloomberg on Wednesday. “The stock largely hinges on whether or not it can continue to sustain the types of growth rates that we’ve seen.”

Shopify has been a high-flyer for a number of years now but the pace has measurably quickened over the past few months. SHOP gained 118 per cent over 2017 and 49 per cent over 2018 but since January 1 of this year, the stock is up a remarkable 108 per cent.

A number of factors have been offered as contributing to the jump in share price, ranging from Shopify’s entry into the S&P/TSX 60 group of stocks to a general sense that as the company matures, the market is growing more optimistic about its prospects.

In the main, though, Wong says it’s the potential to reach beyond its core business platform that is driving up SHOP’s share price.

“When we think about the trajectory of Shopify, I think a lot of people look at the new opportunities that they could potentially enter into, whether it’s on the enterprise side, expanding into e-commerce, to payments. That’s what led to the growth in valuation over the last 12 months,” says Wong.

“I think that they’re the future of commerce for Mom and Pops. Amazon has a very clear place in what they deliver broadly across the buying universe but when you think about smaller brick and mortar businesses there really isn’t a good option for that subset of the market and that’s what Shopify caters to,” he said.

But Wong says even if Shopify does well in expanding its business, much of that promise is already baked into SHOP.

“We downgraded the stock a couple of weeks back, not so much on competitive threats or any concerns with the business structurally but more just in terms of thinking that expectations had gotten pretty lofty,” he says. “And just looking at the potential upside that could be generated from their existing businesses, we thought that the stock was fairly valued.”

“We’ve seen from other vendors on the enterprise side that sell into e-commerce, they do other things like sales automation and marketing. I think that if Shopify approaches their long-term strategy similar to that, then it could potentially be a longer-term holding for a lot of investors,” he says.