Is Shopify a buy after topping $2,000 for a new all-time high?

·3 min read
The logo of Shopify is seen outside its headquarters in Ottawa, Ontario, Canada, September 28, 2018. REUTERS/Chris Wattie
The logo of Shopify is seen outside its headquarters in Ottawa, Ontario, Canada, September 28, 2018. REUTERS/Chris Wattie

Shopify (SHOP.TO) topped $2,000 on the TSX and US$1,600 on the NYSE (SHOP) on Thursday for the first time to reach a new all-time intraday high, but there are two sides to the story investors need to know before buying the stock.

It has had an amazing run, up more than 4,500 per cent over the past five years and 56 per cent over the past year.

Like most high-growth companies, the stock is expensive on a valuation basis. Shopify's price-to-earnings (PE) ratio is 164. For the sake of comparison, Amazon's (AMZN) PE is 68.

"We don't own it and wouldn't buy it here. The company is fantastic, but the valuation of the shares is nonsensical," Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel, told Yahoo Finance Canada.

But that doesn't mean the stock won't keep going up.

"The charts seem to suggest it will, in the near term at least. It's a momentum trade and a growth trade at a time when investors seem to be fading the value/cyclicality/back-to-work trade," said Madden.

"It's also the largest company in Canada and the largest weight on the TSX (approximately 8 per cent), which means passive investors and ETFs must buy it in droves."

Is Shopify's valuation warranted?

Shopify was in 5i Research's more aggressive growth portfolio for years before being shifted to the more conservative balanced equity portfolio. Peter Hodson, founder and head of research at 5i Research, says investors have been calling the stock expensive since it was $30.

"New highs are nothing new for this company. We like the balance sheet, management, growth and market share," Hodson told Yahoo Finance Canada

"When a company has many positives, its valuation often just 'goes along for the ride'."

(Yahoo Finance Canada)
(Yahoo Finance Canada)

Hodson says there's not much to dislike about Shopify and expects growth to continue.

"Based on consensus, earnings per share is expected to more than double this year. It is not just a pandemic story, it was growing very fast even before we had heard of Covid and has $8 billion in cash," said Hodson.

"We liked the partnerships this year with Facebook and Google, which was a solid endorsement."

Hodson says the key to the company's valuation is whether it is justified, and he thinks it is.

Shopify received three price target upgrades today. Susquehanna raised its target from US$1,500 to US$1,800, Roth Capital raised it from US$1,530 to US$1,750, while Stifel increased it from US$1,400 to US$1,600.

Shopify ended the day at an all-time high of $2,003.51 in Toronto and US$1,594.09 in New York. 

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

Download the Yahoo Finance app, available for Apple and Android.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting