Is Shopify an overvalued stock?

Canada’s e-commerce juggernaut Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) has had a little lift to its sails over the past couple of weeks, leaving investors wondering if the stock is getting ready to take off like it did last year. Probably not, says Scotia Wealth Management advisor Greg Newman, who thinks for the moment, at least, Shopify fits the description of ‘great business, overpriced stock.’

SHOP rose again on Monday to hit $1,496.68. at market close, leaving the stock up just four per cent for the year but up about 15 per cent for the past two weeks. That’s a far cry from the 178-per-cent return SHOP delivered over the full 2020 year, but it’s also in keeping with the performance of many big tech names in 2021, especially in the e-commerce space.

Companies like Amazon and Canadian retail and restaurant tech company Lightspeed POS are both hovering around even for the year, as the market turns its attention to other sectors in anticipation of a post-pandemic economic boom.

“Short term, I think Shopify is a little bit overvalued,” says Newman, senior wealth advisor at Scotia, who spoke on BNN Bloomberg last Friday. “It’s a great economic engine. When you have the world coming back to normal, the online world is going to be a little bit slower, but these guys are so well established, they’re going to continue to grow against the backdrop.”

“But the real question here isn’t the business because the business is excellent, like Google or an Amazon that really takes over the world, ultimately. It’s the valuation that the market wants to place on names like this, which is a very, very fickle thing,” he said.

Shopify has had its share of both devotees and detractors over the years, as the company has pole vaulted from start-up to Canadian success story to worldwide phenom. The knocks have been plenty, ranging from concerns about profitability and the quality of merchants using its platform to predictions that Big Tech names like Facebook and Amazon will either ruin its business model or muscle in on Shopify’s market.

But SHOP has more than persevered — it has flourished in the last half-decade, continually expanding its reach, products and capabilities, all the while delivering above guidance and beating analysts’ top and bottom forecasts on a regular basis.

Most recently, Shopify wowed with its first quarter 2021, where revenue grew by an amazing 110 per cent year-over-year to $988.6 million and gross profit was up 117 per cent to $559 million. Overall gross merchant volume, the value of goods sold on SHOP’s platform, rose 114 per cent for the Q1 to a whopping $37.3 billion. On average, analysts had been calling for $859 million in revenue and $458 in gross profit.

And SHOP has come through big time for its shareholders, too, of course, returning some 3800 per cent since mid-2016.

But for investors who bought SHOP more lately, somewhere near its peak at $1,500 or above, Newman says you might have to wait a while for it to get it mojo back.

“If you got in at $1,500 — and a lot of other people got in at $1,500 — the problem is that’s overhead resistance and a lot of people want to sell to get their money back,” Newman said. “And so, if you bought it at $1,500, just as long as you’ve not gotten in over your head and you’re not on margin or you’re going to lose your home or something like that, if you can wait it out, I would wait it out.”

“I think five years from now you’re going to be more than fine. I think the name will double five years from now,” Newman said. “But in the next little bit I don’t see it really doing very much,” he said.

“Shopify is going to grow but maybe at a slightly less brisk of a pace. [In the first quarter,] their earnings were $2 versus $0.75 last year, so year-over-year you’re not going to have growth like that in 2022 over 2021. That rate of growth is going to slow, but they’re already a very significant presence and they’re going to continue. And I think you’re going to want to be a part of it,” Newman said.

Shopify’s touted its global reach in a Deloitte report on the company’s economic impact, which found that one in every 1,000 employed adults worldwide is supported by a Shopify merchant, amounting to 3.6 million jobs around the world. In the US, the report found Shopify’s platform helps generate over $166 billion in economic activity and 714,523 jobs and $18 billion of economic activity in Canada and 123,574 jobs.