Buying Shopify stock is like going to the casino, this investor says

Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) has been on the move again lately, and while that might be good for current shareholders, portfolio manager David Driscoll says it makes jumping in right now that much more of a gamble for investors looking for a piece of the action.

Shopify rose to new heights this week as the market can’t seem to get enough of Canada’s e-commerce sensation. The company did tremendously well in 2020, both from an operational perspective and as far as the share price is concerned, almost tripling in value over the course of the year. Now, in 2021, SHOP is already up 29 per cent.

What’s changed? For starters, Shopify is expected to release blow-out numbers with its quarterly report due next week. Those would include, of course, results for the holiday shopping season where online platforms saw record sales across the board during the continuing COVID pandemic which has only boosted the growth in e-commerce worldwide.

Beyond that, Shopify recently announced its online payments service Shop Pay will be available beyond SHOP’s own platform and be accessible on Facebook and Instagram, thus giving merchants a much wider landscape to sell their goods and Shopify shareholders even more faith in the company’s growth potential.

“Through our continued work with Facebook, we’re excited to combine the best in commerce with the power of community, extending the benefits of Shop Pay to even more people buying and selling with Shops on Instagram and Facebook,” said Shopify in a February 9 press release.

But while the good vibes surrounding Shopify are all fine and dandy, investors still need to tread very carefully with this stock, says Driscoll, president and CEO of Liberty International Investment Management, who likens investing in SHOP to a casino bet.

“Our first purchase of Shopify was in our tax-free savings accounts at around $83 a share, so we’ve had some really big profits,” said Driscoll, speaking on BNN Bloomberg on Wednesday. “But along the way, because this is also what’s known as a concept stock, every time it doubled we were taking profits. So, $160, $320 $600 a share, we were taking money off the table.”

“Investors have to understand that when buying a concept stock they have to really manage their cash just like professional gamblers at the casino in Vegas — they’ll go to the tables with $1,000 with them and $1,000 in the vault. When they double their money they take $1,000 off the table and put it in the vault and it isn’t until they’ve doubled the money twice before they increase their bet size,” Driscoll said.

How did Shopify perform after its last quarterly report? The company’s third quarter 2020 beat analysts estimates on the top and bottom and produced record revenue, yet apparently the market expected more, as the stock dropped (temporarily) over the quarter. For years now, Shopify has consistently generated better-than-expected revenue, yet the high valuation may make it more difficult to continually meet those high expectations.

Driscoll said, “Shopify is doing great as an e-commerce platform and they’re starting to move internationally. But again, you have to look at the valuation, where the price to book is at 28x and price to sales is at 70x.”

“It’s a hot topic stock and it’s probably on all the bulletin boards out there for people to just buy, and as I said before, people aren’t buying based on true valuation. They’re just essentially buying it based on noise,” he said.

“So, if you want to buy Shopify today, probably buy a half a position. If it were to double, which would be around the $3,600 mark, then please take half off the table because the last thing you need is to buy it today at $1,800 and last March it was trading around $450 so that would be a catastrophic loss if you really went gung ho on the stock today,” Driscoll said.

Shopify sees itself as riding a seismic shift in the economy where more and more individuals — especially younger generations — are seeing entrepreneurship as key to their future. That puts SHOP’s platform front and centre as enabling both the continuing move to online shopping and the entrepreneurial wave.

“We envision a future where everyone is an entrepreneur,” said Shopify president Harley Finkelstein in a conversation with the Financial Post on Monday. “And several signs indicate that we’re moving in that direction. We see business applications are up here in Canada and in the US, and there’s this increased interest from students and young people in terms of starting businesses.”

“In 2020, every 28 seconds we saw a new entrepreneur make their first sale on Shopify and that’s down from every 52 seconds in 2019.,” Finkelstein said. “98 per cent of companies in Canada are small businesses and it feels like they need our support more than ever before. It feels like the mission of Shopify, which is to empower entrepreneurs and to create more entrepreneurs, that mission has never been more important, and I think the country needs an entrepreneurship company and that’s Shopify.”