Smart investors look for value at every stage in a company’s life cycle. When a company is starting out, its valuation is likely to start out much higher, driven largely by growth rates and the ability of management to eat into the market share previously held by competitors. Market capitalization is thus more of a vote of confidence from investors, and a validation of an underlying business model that may have been previously undervalued.
As it turns out with tech giant Shopify Inc. (TSX:SHOP)(NYSE:SHOP), it appears that early investors did just that – undervalue the company’s business model. After all, other companies have existed in this space for some time, many of them not turning out as great as some of the early stage investors had hoped. While the e-commerce company’s valuation may have seemed high initially, the recent run up in Shopify’s share price to the $120 level (shares have actually traded above $135) is an indication that the company is very quickly taking over its sector, to the cheer of investors and analysts alike.
While the hype is real, and Shopify has indeed lived up to the hype, posting an impressive record of earnings beats since the company’s initial public offering, new investors considering Shopify continue to have the same questions surrounding the company’s valuation. Is a forward price-to-earnings ratio in the 200+ level too high? Investors in companies that did not turn immediate profits like Facebook Inc. (NASDAQ:FB) and others would know that this may not necessarily be true.
Whatever the case, investing in a growth play like Shopify requires an investment methodology that involves long-term commitment to such a name.
Invest wisely, my friends.
