With Shopify Inc. (TSX:SHOP)(NYSE:SHOP) seeing its market capitalization more than double this year, many investors are wondering how much upside this company has moving forward, and if Shopify is a company whose long-term prospects outweigh its current rich valuation.
Even compared with other tech companies which have traditionally traded at very high multiples relative to peers, Shopify blows companies like Amazon.com, Inc. (NASDAQ:AMZN) out of the water (for reference, Amazon’s price-to- sales and price-to- book are 3.2 and 21.2, respectively).
Bulls on Shopify will argue that this growth company has done a very good job of growing revenue and earnings of late, partnering with companies such as Amazon to grow their business even faster. The thought process is that the company’s impressive growth out of the gate should demand higher-than- normal growth expectations moving forward, as Shopify goes after market share to become the industry leader. As growth continues to pick up, multiples should fall back in line with a longer-term number.
While I agree that Shopify’s business model and impressive growth rate will lead this company to become a real player in their industry, I am not completely sold on the growth expectations that are currently being priced into Shopify’s stock. At current levels, I would advise those considering Shopify to "shop around," or at least ensure that Shopify remains only a small portion of a well-diversified portfolio, because as we all know, tech re-valuations can be very unkind to unprepared investors.
