Shopify’s valuation is just plain frightening, says David Prince

Thanks goodness for Canada’s technology sector, which is doing all the heavy lifting of late in the Canadian markets. But there are some troubling aspects to the tech boom, according to market strategist David Prince, who says Shopify’s (Shopify Stock Quote, Chart, News TSX:SHOP)sky-high valuation is worrying.

The TSX has had a good run over the last few months, with the S&P/TSX Composite climbing almost 40 per cent since bottoming out in late March. Much of that momentum has come from the Canadian tech field where information technology stocks like Shopify and Kinaxis have been very strong performers since the start of the COVID-19 pandemic.

Comparing the numbers, the S&P/TSX Composite Index is currently down eight per cent for 2020 while the S&P/TSX Capped Information Technology Index is up an incredible 44 per cent for the year.

And Shopify has been a singular booster of both indices, as the stock is now up 174 per cent in 2020. Yet Prince of Harbinger Capital Markets Research says investors should be spotting trouble in SHOP’s rise.

“I can tell you that we have wrong for the last $400 on this stock…”

“I hate when you see flagpole formations on a lot of these stocks, but certainly I can tell you I’ve been wrong for the last $400 on this stock,” says Prince, who spoke on BNN Bloomberg on Friday. “But to recommend people to buy this at this stage is very frightening to me.”

“We all can remember Bre-X and Nortel, and both of those stocks achieved the same level of contribution that we’re currently seeing from Shopify,” Prince said. “[But] the biggest push in Shopify shares is coming from South of the border. The big foreign buyers have mostly been the US and they’ve been driving the stock higher.”

Prince says Shopify puts Canadian investors in a bind since those looking for broad exposure through indexed funds will in most cases have SHOP in their portfolios —whether they want to or not.

“For Canadians stuck with trying to be indexed, they’re forced into buying this crazy stock, regardless of what the fundamentals may be,” Prince says. “Sure, they’re going to be great but for how long and with what competition in two years time, which is certainly a question mark. My point is to pay for 2000x future earnings, that’s called expensive.”

Shopify’s e-commerce platform has been heralded as an economic saviour of sorts during COVID-19, where bricks and mortar stores have had to shut down and turn to an online presence to reach customers. Shopify reported that between March 13 and April 24 the number of new stores on its platform grew by 62 per cent compared to the previous six-week period.

But Prince is skeptical of the durability of that trend.

“There is a limit to growth, and more importantly, if you’ve got all these companies that are desperately signing up for Shopify’s package now, what’s going to happen in two to three years time? That’s the unknown,” Prince said.