Shopify trades at an “obscene” multiple, this fund manager says

These are heady times for Shopify (Shopify TSX, NYSE:SHOP) and its well-rewarded shareholders.

With the stock already setting a blistering pace for the year, many predicted that there’d be little boost to the upside from the company’s latest quarterly earnings. Oh, ye, of little faith! Now the question is, how much further can the stock go? Still further, says Scotia Wealth’s Greg Newman, who nonetheless thinks that investors should wait for a pullback before jumping on board.

“We’re off to an incredible start this year, as more merchants around the globe choose Shopify to start, grow, and manage their businesses,” said Amy Shapero, Shopify’s CFO, on the Tuesday release of the company’s first quarter fiscal 2019 financials. The Q1 featured adjusted earnings of $10.3 million or nine cents per share on revenue of $320.5 million, almost a 50-per-cent year-over-year increase. (All figures in US dollars unless noted otherwise.)

The top line growth was a surprise, as analysts had predicted $310 million in revenue. As a result, SHOP jumped seven per cent in Tuesday’s trading and has climbed higher on both Wednesday and Thursday. Altogether, Shopify’s share price has shot up 82 per cent year-to-date.

“The information age is rapidly changing how commerce is done and by whom,” said, Shopify’s CEO Tobi Lütke. “By harnessing these changes to empower entrepreneurs, Shopify is meeting a need that is not only global and growing but is likely to continue growing for the foreseeable future.”

Newman says that while there’s reason to be cautious about the stock, there’s no denying Shopify’s growth potential.

“There are numerous drivers to sustain revenue growth,” says Newman, portfolio manager and senior wealth director at Scotia Wealth, to BNN Bloomberg on Thursday. They’ve got e-commerce, Shopify Plus and International, which they just started and are making really good traction there.”

“The bad thing is that it trades at an obscene multiple — 312x 2020 P/E. But on an EV to sales, it trades at 13x, which is still richly valued, but it is growing at 60 per cent earnings per share and that’s probably conservative,” he says.

SHOP has proven itself noticeably resilient over the past two years, surviving a number of short-seller attacks along with market worries about increasing competition in its e-commerce space. Last year, the stock suffered five separate downturns of more than 15 per cent yet it still managed to finish the year up 49 per cent.

“I think to buy this name you want to use the chart — I don’t think you want to buy it at $345,” says Newman. “You’ll probably have an opportunity to buy it again somehow at $280 — and by that time, you’ll be too scared to buy it, but I think that this is a name that could go discernibly higher in the next five years. If you look at the history of Google or Facebook, I think it’s got that kind of chart.”