About one year ago, I recommended Shopify (NYSE:SHOP) stock despite its valuation. With its massive revenue growth and its position as one of the easiest ecommerce platform not named Amazon (NASDAQ:AMZN) from which to sell, I saw and continued to see its growth potential. Since that time, Shopify stock has risen by over 50%.
However, valuations have become even more stretched since that time. Given the high multiples, I think investors should wait for a pullback before opening a position in SHOP stock.
Don’t Worry About Amazon Storefront
Despite my take on the stock, I love Shopify as a company. I still see it as the “anti-Amazon,” the (relatively) little company that gives the little guy a shot at competing with Amazon and other large peers. Despite these benefits, the SHOP stock price took a hit when Amazon announced they would offer their own small business ecommerce platform, Storefront.
While I agree that SHOP has moved ahead of the fundamentals, I do not see potential competition from Amazon as a reason to sell.
Businesses choose the Shopify platform in large measure to get away from Amazon. Most small businesses who choose Shopify would also prefer to not sell on their site, or sites such as eBay (NASDAQ:EBAY) or Etsy (NASDAQ:ETSY) for that matter.
Worry About the Multiple
For this reason, I believe in Shopify’s future. Still, at some point, valuation matters. With Shopify stock, the price-to-earnings (PE) ratio has reached dangerously high levels. If SHOP earns 21 cents per share this year as predicted, the forward PE comes in at around 700! When compared against forecasted 2019 earnings of 61 cents per share, that still brings the PE to 240 at current prices.
Analysts predict average annual growth of 98.75% per year over the next five years. I can even see such growth justifying a triple-digit PE ratio, especially since SHOP’s market cap is only about $15.7 billion. However, despite its position as a mid-cap company with tremendous growth, I cannot recommend buying at its current multiple.
Shopify stock has reached a point where literally anything can happen. Understandably, few want to bet against a company growing at such a rate. As such, I do not recommend shorting SHOP .
I will even admit that it could move higher from here. However, twice this summer, the Shopify stock price pulled back after moving above $170 per share. Time will tell whether that becomes a double top, but it should concern investors.
But again, investors need to evaluate the company and Shopify stock separately. As a company, I believe Shopify has only begun to tap its potential. I also believe SHOP will someday reach a market cap much higher than the $15.7 billion it enjoys today.
If the PE were to fall below 100, I recommend buying every share one reasonably can purchase. Still, for now, prospective buyers should stay on the sidelines.
The Bottom Line on SHOP Stock
Investors should wait for a significant pullback before buying Shopify. The company has done a great job at providing small businesses with an e-commerce platform not dependent on the likes of Amazon.
This success has given the company a profit growth rate flirting with the triple digits, and as such, deserves to trade at a high multiple.
However, Shopify’s impressive strides have their limits. Despite its massive growth and bright future, I cannot go along with the idea of buying SHOP at 700 times earnings.
Still, prospective buyers should continue to watch Shopify stock. Many factors could bring this stock to more reasonable levels. At that time SHOP could become a great buy. However, until then, SHOP stock should remain off of the shopping list.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.