Praise the company but be careful with the stock —that’s the mantra many are preaching when it comes to Canadian e-commerce behemoth Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), whose share price has now doubled over the first half of 2020.
And those gains have put SHOP into the wildly expensive category, says portfolio manager Stan Wong, who has questions about the company’s ability to keep growing in a post-pandemic world.
“At this point, valuation is a bit about an issue for me with this stock,” says Wong, director of wealth management at Scotia Wealth, who spoke on BNN Bloomberg Tuesday.
“No doubt they’ve done very, very well and they’ve made a lot of interesting moves to be a little bit more like Amazon. But if you look at the forward P/E —and this is not a typo— it’s trading at 2370x forward earnings on a forward basis. And the growth rates at about 46 per cent,” Wong said.
“My other concern is that Shopify historically has always catered to more of the small or micro or medium-sized businesses, and that’s the area that’s most vulnerable in this economic environment if we start to see a second wave or if there’s fallout from the pandemic,” Wong said.
Shopify’s share price dipped in February and March with the rest of the market but started sprinting ahead in early April and hasn’t really looked back since.
The Ottawa tech giant’s share price got a boost in early May from surprisingly strong first-quarter numbers which saw sales climb 47 per cent year-over-year to $470.0 million and net income of $0.19 per share compared with $0.06 per share a year ago. Analysts had been expecting earnings of $0.18 per share on revenues of $443.11 million.
“Now more than ever, Shopify needs to be there for our merchants, so our focus during these challenging times is to help solve their immediate pain points,” said Amy Shapero, Shopify’s CFO, in the Q1 press release. “We are well positioned to help our merchants, particularly given the accelerated shift to online commerce. Our strong balance sheet provides us with the flexibility to continue investing in the right merchant-first initiatives, supporting our merchants’ success now and well into the future.”
Shopify ended its Q1 2020 with $2.36 billion in cash, equivalents and marketable securities, while its Gross Merchant Volume for the first quarter was $17.4 billion, up 46 per cent year-over-year, showing increasing activity on its platform even as the COVID-19 crisis was taking a bite out of many sectors of the economy.
SHOP briefly topped $1,200 per share at the end of May but seems to have settled around the $1000 mark of late, which puts the stock at about 50x sales, which is much higher than its historical average of closer to 20x.
Shopify suspended its 2020 guidance in April due to uncertainties surrounding COVID-19, saying in its first quarter press release in May that external factors such as rising unemployment, consumer spending habits and the shift to online retail could significantly impact the company.