I’m not buying Shopify, this Scotia advisor says

Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) continues to surpass expectations at every turn but Stan Wong is still having nothing of it, arguing that the stock is way too expensive and a major reckoning could be around the corner.

“Shopify is not a name that I’ve owned,” says Wong, portfolio manager at Scotia Wealth Management, who spoke on BNN Bloomberg on Wednesday. “Certainly, it’s a stock that’s done quite well and they’re benefiting as brick and mortar merchants accelerate and pivot over to digital commerce, just given the fact that this is really driven by shifting consumer buying habits, particularly with the COVID pandemic happening.”

“When we look at valuations, though, that’s where it gets a little trickier for someone who’s looking for a bit of value or even a reasonable valuation. The stock is trading at 300 times forward earnings. Yes, we’re seeing a possible 40 to 45 per cent growth rate, but we’re still looking at 300 times forward earnings,” he said.

“Then when you look at the price to sales metric, we’re looking at 50 times prices sales so that is off the charts in terms of expensive,” Wong said.

Shopify’s revenue topped $1 billion for the first time in its latest quarterly earnings, announced last week, with a topline of $1.1194 billion, up 57 per cent year-over-year. Adjusted net income came in at $284.6 million or $2.24 per share compared to $129.4 million or $1.05 per share a year earlier. (All figures in US dollars.)

The results came better than expected, as the consensus estimates were for revenue of  $1.05 billion and earnings of $0.98 per share. The quarter represented the 24th consecutive quarter where SHOP’s earnings beat analysts’ forecasts.

“Shopify fired on all cylinders in our second quarter, keeping our merchants well equipped to seize the opportunities presented in a post-pandemic retail era,” said CFO Amy Shapero in a press release.

“As consumer spending remained strong, our merchants thrived and extracted more value from our platform, contributing to our rapid growth. We built on our momentum, making significant updates to our platform infrastructure, expanding strategic partnerships, and advancing our portfolio of growth initiatives to future-proof the success of tomorrow’s entrepreneurs,” Shapero said.

SHOP’s platform continues to draw in more merchants, as the company’s Subscription Solutions revenue was up a full 70 per cent year-over-year to $334.2 million, while Gross Merchandise Volume grew by 40 per cent over Q2 2020 to $42.2 billion.

The company said the continually improving economic environment over the first half of 2021 vis a vis the COVID-19 pandemic has meant consumer spending is shifting back to “off-line retail” and thus the pace of growth in e-commerce should continue to normalize in comparison to the rapid uptake over 2020.

“In view of these factors and Shopify’s performance for the six months ending June 30, 2021, we continue to expect to grow revenue rapidly in 2021, but at a lower rate than in 2020,” Shopify said in a press release.

The market proved seemingly unimpressed, however, as SHOP’s share price is down one per cent since the earnings release. Year-to-date, the stock is up about 35 per cent.

“Shopify absolutely [has] a lot of growth ahead of it,” Wong said. “The problem is that if there is a bump in the road we’ve got some very lofty expectations and very lofty valuations and that’s going to carry some share price risk.”

“If there’s something that goes wrong with Shopify — if there’s some sort of execution that doesn’t bode well with investors, we’ve got a bit of a fall happening that could happen,” he said. 

Wong nonetheless thinks SHOP could be a good trade if investors could catch it on a dip.

“Interestingly, Shopify has really traded quite in lockstep with the S&P 500 and the NASDAQ 100 since last summer, so it hasn’t really outperformed those indices,” Wong said. 

“I would say it’s a pretty high-beta stock for traders you can buy this weakness and trade this stock,” he said. “But, again, valuations are a bit concerning. And then you’ve got to watch out: interest rates eventually will rise and that tends to have a negative effect on high growth stocks such as Shopify.”

Speaking on CNBC after the second quarter release, Shopify president Harvey Finkelstein said regardless of economic normalization this year, the future of commerce will be a blend of online and in-person transactions.

“I think as businesses are rebounding and US Commerce Department is reporting things are going well, it’s a really exciting time for independent brands and merchants,” Finkelstien said. 

“And I don’t think that the future of retail isn’t going to be online or offline, it’s going to be omni-channel. Omni-channel is going to be like talking about colour TV, and a couple years from now, every business will be omni-channel by default,” he said.