Shopify’s valuation is ridiculous, this fund manager says

Shopify (Shopify Stock Quote, Chart, News TSX:SHOP) may be king of the Canadian equities market right now but Royal Bank’s reign may return if history is any judge, says Craig Basinger of Richardson GMP, who claims it’s undeniable that SHOP is overvalued.

Shopify ended the week on a down note, with the stock dropping below the $1000 mark, a height that seemed a long way off (read: an impossibility) as recently as early April when the share price hung around $500. For the first time, Shopify’s success has now pushed its market capitalization above that of Royal Bank, valuing the tech darling at now $119 billion.

Nothing should surprise about this stock anymore, though, as time and again SHOP has shown its strength whenever doubts arise about its durability.

Gone are the days when short-seller attacks shook investor confidence in Shopify, but who could have expected a rally like this in the middle of the worst economic crisis in over a decade?

Well, lots of folks, really, as the loss of bricks and mortar retail in the age of social distancing has hastened the move to e-commerce for businesses big and small, leaving Shopify’s online commerce platform a clear winner.

Basinger, chief investment officer for Richardson, says its not just Shopify but a lot of tech companies that are doing well during the pandemic, as investors have been seeking out businesses with the fortitude to make it through the current crisis, one which has yet no clear end date.

“I think the market is gravitating toward a few companies that operationally perform well in this kind of environment,” Basinger said on BNN Bloomberg on Thursday. “There’s no question that tech has done really well and it’s not just because we’re [using] things like FaceTime and WebEx and all these new tools. It’s because they have fortress-like balance sheets which mean that there are no actual liquidity issues at the company level.”

“I think there have been other big winners in this space because operationally they benefit from [the COVID-19 crisis],” Basinger said. “Clearly, with Shopify becoming the largest company in Canada, they are in a position to benefit from it, Amazon is, and I was looking at Wayfair. That stock is up 600% since the March low.”

As for Shopify’s chances at staying atop the list of Canada’s largest companies, there have been notable tech names in the past —think Nortel, think BlackBerry— which had their day in the sun as Canada’s top dog, only to succumb to takedowns of a stupendous nature.

Will Shopify suffer the same fate? It’s unclear, says Basinger, but what’s undeniable is that SHOP’s share price is way out of whack, calling it “ridiculous”.

“I don’t think anybody would say Shopify isn’t overvalued. They’re at close to 80x sales looking at 2021,” says Basinger. “But that doesn’t mean it can’t keep going up because this is a market that is reacting to news and changing behaviours and changing dynamics and that clearly changes the market price of things pretty quickly.”

“In Canada, we have a great, long-term tradition of companies becoming larger than Royal Bank, and then, well, it usually doesn’t end very well. But who knows, maybe they’ve finally dethroned the king,” he says.