A question many investors have begun to ask with respect to some of the most high-flying names in the technology sector is how to look at fundamental valuation metrics.
After all, for companies such as Shopify Inc. (TSX:SHOP)(NYSE:SHOP) or Amazon.com, Inc. (NASDAQ:AMZN), valuation multiples appear meaningless - the broader investing community appears to largely be ignoring such fundamentals in favor of ascribing extremely high long-term growth rates based on industry disruption and competitive advantages which will lead to superior long-term profitability.
In other words, how much money a company loses today really should have no impact on its stock price, as long as the long-term growth rate ascribed by the market stays the same.
With companies such as Shopify and Amazon showing impressive top-line growth for years, often losing substantial amounts of money to acquire a large customer base, investors betting on continued economic improvement have put their faith in these companies as the stewards of economic growth moving forward.
In one sense, an investment in Amazon or Shopify could be looked to as an investment on the broader North American market; such bullish sentiment which has driven the entire market forward would thus be amplified for investors looking at buying a company such as Amazon whose sales are estimated to amount to approximately 15% of U.S. consumption overall.
The trajectory for Shopify to attain such a large and powerful consumer base is what is seemingly driving the company's stock price higher each and every earnings period. In the most recent quarter, Shopify added 200,000 merchants to its portfolio, a merchant base which has now topped half a million.
The massive valuations placed on extremely large consumer bases is likely to provide some sort of downside protection for investors, making Shopify the newest "extremely difficult" company to bet against on the market today.
Invest wisely, my friends.