Shopify Stock Is Not Worth Anything Close to $275 Per Share

Will Healy

Tue, May 28, 2019, 5:35 AM

Amid calls to sell Shopify (NYSE:SHOP) stock, the equity continues its march higher. Despite multiples that resemble 1999 valuations and endless calls by analysts urging traders to sell SHOP stock, Shopify stock continues to rise. Now it has become not only expensive, but also unpredictable. Due to the uncertain nature of Shopify, investors should simply log out of SHOP.

Shopify Versus Shopify Stock

Source: Shopify via Flickr

I cannot praise the business model of Shopify enough. SHOP allows small firms to build e-commerce platforms that are separate from those of large players such as Amazon (NASDAQ:AMZN). Moreover, it enables small businesses that might not otherwise be able to sell products outside of their immediate surroundings to bring their goods to the world. This value proposition has helped SHOP’s annual profit growth exceed 50% for many years.

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However,SHOP’s position as a market disruptor does not make me like SHOP stock, at least at its current level. Seeing the performance of Shopify stock reminds me of a famous Mark Twain quote:

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“Never argue with stupid people, they will drag you down to their level and then beat you with experience.”

In fairness, I would attribute the excessive valuation of Shopify stock to ill-advised decisions rather than stupidity. Still, the quote describes my feelings whenever I think about buying SHOP stock. Though Shopify stock continues to defy gravity, I believe that most owners of SHOP stock will face a grim fate at some point.

Trading above $270 per share, SHOP’s forward price-earnings (PE) ratio now stands at about 293. Both myself and other analysts have argued that even 50%-plus annual profit growth does not justify such a multiple.

But nobody seems to care.

Despite its sky-high valuation, Shopify stock has risen by about 140% since Dec. 24. SHOP stock has continued to rally despite the fact that many factors could derail its upward movement. As InvestorPlace’s Vince Martin pointed out, the small firms which Shopify serves will likely bear the brunt of any macro-economic slowdown. He also called the company’s transaction-based revenue model dangerous. InvestorPlace columnist Dana Blankenhorn went further, calling SHOP a “bubble” and pointing out that a number of market pros have assigned SHOP stock negative ratings.

Shopify Stock Has Become Too Unpredictable

Also, many forget that SHOP has competitors. A large number of site operators prefer WooCommerce. Moreover, Magento, now owned by Adobe (NASDAQ:ADBE) has partnered with Amazon to make small platforms integrate more easily with those of the e-commerce giant.

Despite these challenges, Shopify stock continues to surge. Stock-market history indicates that SHOP, like its once-high-flying predecessors, will eventually fall to its fair value. However, history also suggests that it’s difficult to predict when such moves will occur. Thus, I have no idea how to time the coming correction of SHOP stock. At this point, a long position can lead to outsized profits, but it could just as easily turn investors into bag holders.

The valuation of SHOP indicates that traders should short Shopify stock, at least in theory. However, its 293 forward PE suggests that investors have become irrational about SHOP. Since SHOP stock stopped trading on fundamentals long ago, one has to admit that the shares’ forward PE could reach 500 or even 1,000.

Because both long and short positions carry tremendous risk, traders are left with only one responsible option: staying away.

The Bottom Line on Shopify Stock

SHOP makes products that can only be found locally available to the entire world. Given the high number of businesses that could benefit from an online store, SHOP is a significant market disruptor.

Unfortunately, Wall Street knows this all too well. Despite a forward PE ratio that’s approaching 300, Shopify stock trades near its all-time highs. That price level makes it very difficult to predict the direction of SHOP.

Despite its tough competition, Shopify continues to take small businesses to a higher level. Unfortunately, investing in Shopify stock will probably not take traders to a higher level. Given the valuation of SHOP and the threats to its business, avoiding it has become the only responsible recommendation.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.