Shopify Is Not a Good Way to Play the Coming Growth Stock Rebound

SHOP stock - Shopify Is Not a Good Way to Play the Coming Growth Stock Rebound

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Despite its sharp retreat over the last several months, Shopify (NYSE:SHOP) stock still has an exorbitant valuation at a time when Wall Street is shunning such names. And with investors looking for firms whose profits are increasing, the Canadian company’s bottom line is expected to fall sharply in 2022. Also hurting Shopify’s outlook is the fact that the e-commerce sector  appears to be one of the Street’s least favorite type of businesses at this point.

In light of all of these negative factors, I urge investors to sell SHOP stock.

A Huge Valuation, Decelerating Revenue and a Poor Profit Outlook

Shopify’s shares have sunk 67% so far this year. Nonetheless, the name is trading at a huge forward price-to-earnings ratio of 189x and a large, trailing price-to-sales ratio of 12.7x.

Analysts, on average, expect Shopify’s sales to surge nearly 30% this year. Particularly in the current climate, that’s not enough growth to justify the valuations at which Shopify is trading.

Making matters worse, analysts, on average, expect the company’s earnings-per-share to tumble nearly 50% in 2023 to $4.27 from $8.09 this year. Additionally, in February, Shopify predicted that its revenue growth would fall in Q1, versus the previous quarter, and the company warned that the positive catalysts that it had obtained from the lockdowns and “government stimulus” in 2021 would not occur again this year.

While it’s true that I expect investors to become much more bullish on growth stocks later this year, I think that it will be a long time before the Street embraces companies with very high valuations whose profits are sinking.

E-Commerce Has Lost Its Luster

Investors could not get enough shares of e-commerce names during the pandemic, but now they seem to be running away from the sector. For example, so far this year, Amazon (NASDAQ:AMZN) has declined 15%, while Wayfair (NYSE:W) has slumped 57%.

Investors’ confidence in SHOP stock and other e-commerce names is likely to increase as fears about inflation and overwhelming interest rates ease later this year. Still, given the high valuation and declining profits of SHOP stock, I think that there are much better names with which to play that trend.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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