Why Is Shopify Stock So High? - Financhill

Why Is Shopify Stock So High?

Why Is Shopify Stock So High? The Canadian company Shopify announced product enhancements earlier this year – enhancements that have changed the game. After the company’s announcement, its share price skyrocketed almost 8% – SHOP stock price hit a record high for the company.

Some of these key new features included updating Shopify Plus and redesigning their online store experience. These announcements and others put investors in a truly upbeat mood.

Is Shopify a Good Stock?

Shopify [SHOP] allows small business owners to sell their products online on a user-friendly platform and skip the middlemen, such as Amazon and Etsy.

The growth Shopify has already experienced – and the continued growth analysts expect – could justify the recent jump in valuation.

In fact, analysts project an earnings growth of over 65% for 2020 and continued growth of around 75% for each of the next five years. As a company that’s not seen profit until 2019, these predictions could very well be prophetic.

Looking back at Shopify’s price-to-sales ratio over the past five years, their average has been right around 19.1. These new developments have shot the company’s P/S to almost 49.2. When compared to the S&P 500, Shopify is outperforming the index – S&P average ratio of price-to-sales is slightly lower than 2.3.

The company’s revenue grew by 47% at the same time last year. This is even greater than the overall growth rate of ecommerce in general, which is estimated to hover just below 15%.

As Shopify recovered from the panicked pandemic sell-off, it reached a record-setting price-per-share of $844 in May.

Why Is Shopify So Expensive?

The ecommerce platform giant has a current enterprise trading value/sales ratio of almost 70.

When Shopify hit a 52-week low earlier this year, analysts never imagined it rise from the ashes – the stock at time of press was up over 260% from that low.

But, akin to the housing bubble of 2008 and 2009, it appears Shopify could be the ecommerce bubble poster child.

Of course, Shopify’s premise is a sound one – especially during a time of rising at-home shopping. In fact, many traditional businesses have chosen ecommerce as their one and only method of survival currently.

The problem is that the bulk of Shopify businesses are exactly the ones that normally fail horribly during economic slowdowns. But – at the same time – that could be exactly why Shopify seems so attractive at the moment.

Companies like Shopify are the precise ones that can benefit from the guidelines and measures created to aid the slow of coronavirus. For instance:

  • Working at home
  • Physical retail shifting to ecommerce
  • Exercising at home rather than at the gym

So, in turn, it makes sense that staff who normally work in an office are shopping for home office products and companies are looking for ways to accommodate an at-home workforce with items like video software or other platforms.

Online orders are rising for products people would normally just run to the local store for. It also follows that purchases of at-home workout equipment would be on the increase as gyms are closed.

See, the thing about bubbles is that they can look like a bubble and act like a bubble – but to know for sure, it has to pop.

Company valuations that look crazy will turn to justifiably insane – as will their corresponding valuations.

What Was Shopify IPO Price?

When Shopify went public in 2015, their original shares were priced at $17. As of July 10, 2020, Shopify shares sell at $1032 – nearly a 5,000% jump from their IPO. This surge in valuation has much to do with their incredible growth – revenue grew over 22 times since 2014’s $67 million to 2019’s $1.6 billion, creating a market capitalization that began at $1.3 billion and skyrocketed to $86 billion.

This is testament to the company’s incredible growth – but doesn’t show the whole picture. Over that same four-year period, Shopify’s net loss also grew – from $22 million in 2014 to $125 million in 2019.

This is another signal that Shopify stock could be overvalued. But, say you’d purchased shares back in 2015, you’d still have seen over a 2,700% gain on your initial investment.

Is Shopify Stock Overvalued?

Shopify stock could be considered overvalued. While the coronavirus crisis has left many brick-and-mortar retailers filing bankruptcy claims, online retailers have seen a boom in business as shoppers – many of whom shopped online but purchased in-store – have had no other choice.

Some analysts still think, even if the current crisis wages war for several more months, that Shopify share prices aren’t sustainable.

They consider the current demand for companies such as Shopify and video conferencing platform, Zoom, to be connected to the virus.

Once that goes away and the world returns to a semblance of normalcy, the current demand for these services will plummet. But that remains to be seen. If the “new normal” incorporates any of the current need for these services, share prices could be deemed right where they should be.

Why Is Shopify Stock So High: The Bottom Line

Analysts can say what they like about past performance and such, but what investors really care about is the predictions for the future – what is going to or likely to happen?

Shopify stock is already hovering around $1,035 per share at time of press. It could very well top $1,060 – look at the 261.8% extension. If you consider a three-time range in your investments, share prices could even go as high as $1,171.

But if that extension prediction acts as a resistor, you’ll have to consider the possibility of correction, whether through choppy patterns over time or simply by a dip in stock prices. The bottom line is Shopify’s fiery stocks have caused investors to overbuy – but no fat lady has sung quite yet.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.