Shopify. Time to Buy?

Canadian tech darling Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) is up to its old tricks again in hitting new highs and confounding those of us who either didn’t buy earlier on and are now spooked by the valuation or bought and sold too early. Not to worry, says Jamie Murray, portfolio manager and head of research at the Murray Wealth Group, momentum stocks like SHOP will always have their big ups and downs, giving would-be investors proper entry points along the way.

“We’ve just been holding our position pretty confidently at these levels. If you don’t own it, definitely start to pick away at it,” Murray said, speaking on BNN Bloomberg on Monday.

“Shopify has had a great run,” he said. “These growth names, they’re volatile so there’s usually a good chance to pick them up when they get in these growth scare pull backs, whether it’s from yields rising or just some sentiment change.”

“So, if you don’t own it I’d be looking to pick it up at a better entry point. But if you do own it I’d just keep holding,” Murray said.

Shopify hit a new high of $1,862 by the end of last week and is already higher again, closing at $1,899.86 on Tuesday. The updraft since mid-May would be remarkable — the stock has gained almost 50 per cent in value over that time span — but this is Shopify we’re talking about, the stock that surpasses expectations and defies (most) explanation.

The company is worth a hefty $236 billion by market capitalization and is valued at somewhere around 300x forward earnings. That’s heady territory when the average forward price-to-earnings ratio on the tech-heavy NASDAQ is around 28x and fellow e-commerce company Amazon (NASDAQ:AMZN) has a forward P/E of 50x.

But Murray says investors need to consider the business model Shopify is sporting and figure that growth into your calculations.

“We think Shopify is a hold at these levels. It’s a hold in the true sense that it’s a larger position in our Canadian portfolios. It’s probably about in line with what the market index weight is — we don’t really pay attention to that but it’s about a five-per-cent position for us in the portfolios,” Murray said.

“It’s a great company, a great strategy and great leadership at the top, and they really do have a great strategy of building out that core ecosystem for the online sellers and then adding more and more services on top of that and getting that flywheel going,” he said.

“We think Shopify is going to continue to grow very strongly over the next five years,” Murray said.

Shopify’s growth trajectory has clearly been on display in recent quarters where the company is seeing revenue more or less double each quarter with strong earnings growth. SHOP’s adjusted net income for its most recent quarter, the company’s Q1 2021, was $254.1 million or $2.01 per diluted share, which is ten times more than the $22.3 million or $0.19 per share achieved a year earlier.

Shopify’s management has predicted a slower growth rate in 2021 compared to last year, as the pace of growth in e-commerce worldwide ratchets down with the opening of bricks and mortar shops, post-pandemic.

“Merchant solutions revenue growth [is expected] to be driven by continued GMV growth from existing merchants, new merchants joining the platform, and expanded adoption of Shopify’s growing menu of merchant solutions, including established offerings such as Shopify Payments, Shopify Shipping, and Shopify Capital, both geographically and as merchants grow into them, while newer solutions such as Shopify Fulfillment Network and 6 River Systems contribute nascent but incremental revenue in their early stages,” Shopify said in a press release.

Investment managers Guardian Fund recently delivered its second quarter 2021 investor letter, with the authors marveling at Shopify’s growth and the strength of its position in the burgeoning e-commerce sector.

“About ten per cent of all e-commerce in the U.S. is going through Shopify (versus 39 per cent through Amazon). On June 29, Shopify announced that they are removing all revenue share on developer’s (together earning $233 million in 2020) first annual $1 million as well as cutting the commission rates from 20 per cent to 15 per cent, which is about half of what other app stores charge. It has become a no-brainer for software developers to create products for the Shopify App Store. This will further grow the quality of the ecosystem,” the authors write.

The Guardian Fund said Shopify is currently at a fair valuation when considering not only its SaaS platform but also its payments business which takes royalties on e-commerce transactions.

“As as the leading central retail operating software platform the runway of non-linear growth is enormous,” the letter said.