Shopify: trade it don’t own it, says Stan Wong

By now, everyone knows the story on Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), the little Canadian tech company that wowed the e-commerce world to become a revenue-generating machine and a monster of a stock. That’s all roses and sunshine, of course, but the other side of the tale has investors like Stan Wong of Scotia Wealth Management seeing a name whose valuation is well beyond reasonable, making SHOP a possible trade but not at all a buy-and-hold idea.

“Shopify is not a name in our portfolio. I’ve always been a bit concerned about the valuations of this company,” said Wong, speaking on BNN Bloomberg on Wednesday. 

“I think the pandemic helped Shopify in a lot of ways and I’m not certain that the easing of the pandemic will hurt Shopify. With that being said we’re looking at a company that is trading at a forward P/E of over 275x,” he said.

The entrepreneur’s enabler, Shopify has for years defied the nay-sayers (and there have been a ton) and simply gone about its business of creating a high-growth and now very profitable company, one whose shareholders have been richly rewarded for their support.

Shopify’s share price gains in 2020 were massive, for instance, backed by the market’s faith in the accelerated adoption of e-commerce during the stay-at-home COVID-19 work and lifestyle. SHOP put on an incredible 178 per cent last year, going from C$516 per share to C$1,437 by the end of December. 

Even 2021 has been a relatively positive for the stock, which is currently up about 30 per cent for a year that has been decidedly mixed in the tech space. Stocks like Apple and Amazon are up just 12 and six per cent, respectively, while others like Google and Microsoft have done better at positive 64 and 37 per cent, respectively.

By the numbers, the Shopify train shows little sign of slowing down, as evidenced by its latest earnings delivered in July. There the company hit the billion dollar mark for revenue for the first time, coming in with a second quarter topline of $1.119 billion, representing a 57-per-cent year-over-year increase. Adjusted net income was also huge, coming 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 except where noted otherwise.)

Shopify said by way of guidance that although revenue and subscription growth should continue going forward, the rate of uptick may be muted as at least part of the world’s buying and selling is returning in-store.

“Our outlook for the remainder of 2021 is consistent with our assumptions in February. We have seen an improvement in the overall economic environment through the first half of 2021, consumer spending beginning to rotate back to services and off-line retail, and e-commerce growing at a more normalized pace relative to 2020,” said Shopify in its second quarter report. “We continue to expect to grow revenue rapidly in 2021 but at a lower rate than in 2020.”

But looking past the company itself and its stellar stats, Wong thinks investors need to concern themselves with how inflated the stock is on fundamentals.

“Certainly, the growth rate in terms of earnings for Shopify is very, very strong, and we’re seeing a 50 per cent-plus growth rate,” said Wong. “But we’re paying up for this particular name, and in a rising interest rate environment, long duration, high-growth companies may not do so well in this particular environment.”

“The other thing to note is that if you look even at forward price to sales it’s trading at 34x Price to Sales. So that’s very expensive relative to the broader market — you look at [the S&P 500 Index] we’re looking at 3x Price to Sales,” Wong said.

Wong also said that beyond the valuation, he is concerned about Shopify’s exposure to wider economic trends. Being tied to the fluctuations among small and medium-sized businesses could spell trouble if the economy tanks and these businesses either die down or fold altogether. 

“If there is a bump in the overall economy it will have a pronounced effect on a company like Shopify,” Wong said.

“I think that Shopify can make sense from from a trading perspective,” he said. “Lots of beta and lots of volatility in this stock. It has performed very, very well, but I would probably look at it more from a trading perspective as the valuations are a bit too rich for me to want to buy and hold this longer term,” he said.

This week, Shopify launched a new product for its merchants in Shopify Market, a cross-border tool hub that helps merchants manage their international sales.

“We believe the future of retail is retail everywhere. And with Shopify Markets, we’re making it even easier for merchants—no matter size or budget—to turn their global aspirations into a reality,” said Harley Finkelstein, President of Shopify, in a press release.