Will Shopify lead the way?

It’s done well throughout the volatility, but it needs to come down in price – a lot

Andrew Willis 3 April, 2020 | 1:28AM
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Andrew Willis: Shopify (SHOP) has stood like a beacon of hope in a sea of red a few days last week. Anyone following our Twitter posts may have seen the company, boasting big green gains, while other names around them floundered.

So why does Shopify stand with gold stocks amidst all of the market uncertainty? Because the trend is still there. E-commerce certainly got a bump from investor attention throughout the coronavirus crisis. But the question is: is this the start, or end of the trend for Shopify?

COVID-19 connected the dots for investors with many different stocks. From pharmaceutical companies working on potential vaccines, to meal delivery services like Blue Apron (APRN), investor interest in innovative and relevant solutions exploded.

But these bumps are largely related to this new ‘lockdown’ consumer environment. And we don’t know how long this environment will last for. We could enter a prolonged recession, or make a quick recovery. The problem for Shopify, is that that interest been relentlessly building, until recently.

Sector Analyst Dan Romanoff says that although the company has an innovative businessmodel and dominates the marketplace for small and medium-sized vendors online, the stock is simply way. too. expensive.

Shopify trades at more than $620 a share, 116% above its fair value – and that is already after enduring the marketwide crush from the coronavirus. Dan says that Shopify’s had some decent growth with revenue growing 47% year-over-year, and the fair value he’s given reflects a large price to earnings ratio of 681 times. But Shopify currently trades at around two thousand times price to earnings.

Dan has a hard time seeing sustained growth to make up that valuation. You see, along with that market dominance comes vulnerability. Small and medium-sized online vendors make up the bread and butter of Shopify’s business, and even if we’re still stuck at home ordering everything online, a recession, or at least a slow recovery, is going to deplete a lot of disposable income.

As always, it’s best to think in the long term when making your investment decisions. There is a lot of optimism built into the price of Shopify, even if you’re hoping the economy makes the comeback of the century.

For Morningstar, I’m Andrew Willis.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Blue Apron Holdings Inc Class A  
Shopify Inc Registered Shs -A- Subord Vtg92.94 CAD4.56Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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