On Friday, shares of Shopify Inc. (TSX:SHOP)(NYSE:SHOP) closed the day 7.5% lower on increased volume, with many investors seemingly taking money off the table after a meteoric run over the past two years.
Year-to-date, Shopify stock is up more than 112%, and since January 1, 2016, the tech company’s stock has risen more than 250%, making this stock one of the best performers on the TSX during this time frame.
Investors have piled into this stock based on the company’s incredible revenue growth rate since its initial public offering (IPO). Although the business continues to turn in negative earnings, the opportunities for growth and the potential for Shopify to become and industry leader in this space have led investors to assign higher and higher premiums for the company’s stock.
While some analysts have pointed to the company’s valuation metrics becoming a tad onerous, others believe that Shopify’s unique ability to generate growth in an industry with a very long runway should provide investors who get in early with significant earnings down the road. It should also be noted that the growth the company is able to generate is based on 100% equity issuances, as Shopify is a debt-free concern. The ability for shareholders eventually to reap the benefits of unlevered cash flows (should the company’s capital structure stay stagnant, which is uncertain) in the future is a big deal.
Looking back at Shopify five years down the road will be an interesting exercise – only then will today’s investors find out if the exuberance felt today will be rational or irrational.
