Is Shopify’s stock just too expensive right now?
The market seems decidedly unimpressed with the latest move from e-commerce company Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), sending the stock down ten per cent this week on news of its latest acquisition.
But is the dip a good time to jump into the hottest name in Canadian stocks? Not really, says portfolio manager Christine Poole, who thinks that even with the pullback, SHOP is not a sound investment.
Shopify on Monday announced a US$450-million deal to purchase 6 River Systems, a robotics and software company that Shopify says will help in its efforts to build a fulfilment network across the United States.
“Shopify is taking on fulfillment the same way we’ve approached other commerce challenges, by bringing together the best technology to help everyone compete,” said Tobi Lütke, CEO of Shopify, in a press release. “With 6 River Systems, we will bring technology and operational efficiencies to companies of all sizes around the world.”
Massachusetts-based 6 River, which is expected to have about US$30 million in revenue in 2020, was formed by executives of Kiva Systems, the robotics company bought by Amazon and turned into Amazon Robotics.
The deal seems to have met with the approval of some, with analyst Michael J. Olson of Piper Jaffray saying that it acts as a “shot in the arm” for Shopify’s fulfillment network and with Raymand James analyst Brian Peterson saying that it gives Shopify the technical know-how and intellectual property to further its ambitions.
Yet the general market reacted otherwise, dropping SHOP over six per cent on Monday and closing out the week by pulling the stock down over four per cent on Friday. The damage may seem small compared to the massive gains that the stock has made this year— Shopify’s share price is up 138 per cent since January 1. And the dip might seem like a suitable entry point for the locomotive of a stock.
Not so, says Poole, CEO and managing director of GlobeInvest Capital Management, who spoke to BNN Bloomberg on Thursday.
“For us, when we buy companies we’re very much aware of the valuations and the prices you pay to buy a company, and Shopify’s valuation is very high,” says Poole.
“It has executed well and they’re in a very attractive space, online commerce, by enabling companies to sell online. But the valuation is very high and it’s hard to justify or even to calculate what the potential downside is on a stock like this,” she says.
“For us, it’s too momentum-driven and we wouldn’t be buying it here. The price/earnings to growth is at a high ratio even for a growth stock, of almost 13,” Poole says.
The S&P/TSX Composite Index hit a new high on Friday, up 39 points to 16,682, with Shopify’s spectacular run this year playing a big role in the upswing. Shopify has contributed more than 100 points to the Composite Index over the past almost five months. Since late April, the TSX’s Information Technology subgroup has gained more than 19 per cent, by far the best performing sector of the market.