Hold your nose and buy Shopify, this fund manager says

The ride looks scary, to say the least, but investors would be doing themselves a favour and buy Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), says James Telfser of Aventine Asset Management, who argues that despite the sky-high valuation, this stock is a must-own.

Canadian e-commerce success story Shopify is in the middle of a late-year rally as the stock looks to regain ground lost over the last few months and end December on a high note. Coming into the last three weeks of 2019, SHOP is pushing up close to the C$500.00 per share mark, which would put its year-to-date gains at a whopping 158 per cent and rewarding investors who put their faith in the company’s growth potential.

Telfser says that while it’s not easy putting money on a name that has already posted massive share appreciation, investors should be focusing on the company’s performance where they have consistently posted strong revenue growth.

“Shopify is one of those business that when I see what they’ve done in the last few years it makes me proud that it started in Canada,” says Telfser, managing partner and portfolio manager at Aventine, who spoke to BNN Bloomberg on Monday.

“It’s a fantastic business when we talk about retail and what’s hurting retail. Shopify is behind every brand that you see and you want to buy that doesn’t have bricks-and-mortar. They’re doing great things and they’re really expanding into being the full-service solution on the shipping side and everything,” he says.

“You’re never going to get this stock at a cheap valuation because their revenue growth has been at nosebleed levels, but they continue to do that year over year,” Telfser says.

Shopify’s quarterly numbers tell the tale, where the company has posted 17 consecutive quarters of higher-than-expected revenue. During its last quarter, reported in October, SHOP delivered $390.6 million in revenue, up 45 per cent year-over-year, which was paired with operating losses for the quarter of $35.7 million, down from a loss of $31.4 million a year earlier. (All figures in US dollars unless where noted otherwise.)

“You’re never going to feel comfortable buying a name like Shopify but we’ve learned that it is one of the pristine growth names and it is a well-managed company so you just sort of plug your nose and buy it if you want that growth exposure,” says Telfser. “We don’t know where to put it because we have a value-based portfolio and a large-cap dividend growth portfolio, so it doesn’t really fit. But if you can stomach some growth in your portfolio, it would be the number one pick for us.”

National Bank Financial analyst Richard Tse says that Shopify is in the right place to benefit from continued strength in the e-commerce space. In a client update on December 2, Tse looked at SHOP’s numbers for the Black Friday to Cyber Monday weekend and reiterated his “Outperform” recommendation and $400.00 target, saying that Shopify’s gross merchandise volume (GMV), which tracks the total dollar value of orders processed on the company’s platform, is projected to grow by 48 per cent in 2019.

“Our analysis suggests SHOP’s GMV momentum is tracking ahead of our expectations,” writes Tse. “In our view, the data from [the Black Friday-Cyber Monday weekend] is a representation of the year-over-year pace for the quarter, and in this case, suggests SHOP is likely to come in ahead of its Q4 outlook for revenue.”