Should you buy Shopify at “nosebleed” levels?

Canadian e-commerce sensation Shopify (Shopify Stock Quote, Chart, News TSX:SHOP) presents investors with a seemingly impossible choice: do you trust the fundamentals which are screaming that this is a highly overpriced stock or do you bet on the vision and SHOP’s ability to execute which has so far proven to be stellar?

It’s tough one but Ian Fung of Davis Rea Investment Counsel is, for now, opting for the latter.

“This is a hard one to answer because if you look at valuation it’s at nose-bleed levels, but the fundamental story behind the company continues to grow here,” says Fung, vice president and portfolio manager at Davis Rea, who spoke to BNN Bloomberg last Friday.

By now we all know the Shopify story, where the stock that acted like the little engine the could for a number of years, fighting off short-seller attacks and quarterly nay-sayers about its earnings potential, only to triumph last year, rocketing up 173 per cent over the 12-month span. If anything, 2020 has been more eye-popping, with the stock going from C$516 per share at the start of January to as high as C$786 by February 12.

SHOP has since pulled back to the $600 range, but the stock’s gains have definitely put the investment community on alert — as have indications from recent quarters that the profitability bugaboo is about to be vanquished in style.

Shopify’s latest quarter, for example, delivered earlier this month, had the company growing its revenue by 47 per cent year-over-year along with a noticeable improvement in net income which climbed to $50.0 million or $0.43 per share compared to $0.27 per share a year earlier. (All figures in US dollars except where noted otherwise.)

SHOP is wowing investors by its far-reaching ambitions, not settling for being the go-to online merchant platform but by taking aim at the juggernaut known as Amazon through a buildout of Shopify’s own fulfillment network.

Last week’s announcement was a case in point: Shopify surprised on Friday by saying that it would be joining Facebook’s push to launch its Libra cryptocurrency, even as major financial players have already pulled out of the endeavour. The move could signal SHOP’s intentions to now take on names like PayPal in the payments and fintech space.

“Much of the world’s financial infrastructure was not built to handle the scale and needs of internet commerce,”

“Our mission is to make commerce better for everyone and to do that, we spend a lot of our time thinking about how to make commerce better in parts of the world where money and banking could be far better.
That’s why we decided to become a member of the Libra Association,” Shopify’s statement read.

Fung said past experience shows that Shopify’s lofty ambitions should not be taken lightly.

“They’re taking so much share of e-commerce, they’re adding their own fulfillment service, which should support their leading position and they’re one of the biggest tech employers in Canada. So, it’s hard to argue that they will have a huge plunge because they’re nearing profitability and they’re getting closer and closer to those goals that they’ve stated,” Fung added.

“I think the operating team has done a really good job, so I think that they should be able to continue the momentum. But the stock price is definitely up there,” he says.