Here’s What to Do With Shopify (TSX:SHOP) Stock

Shopify Inc (TSX:SHOP)(NYSE:SHOP) stock trades at an incredibly high valuation, but if you look ahead, there’s plenty of reason to hold on.

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Shopify Inc (TSX:SHOP)(NYSE:SHOP) is a millionaire-maker stock. Since 2015, shares are up by nearly 4,000%. Over that period, the S&P/TSX Composite Index rose by just 10%.

But the company is decidedly different today. Its market cap swelled from $4 billion to $160 billion. The valuation is nearing 60 times sales, triple its five-year trailing average.

There’s no doubt that this stock is special, but is it time to harvest the gains?

Another double is possible

To be clear, Shopify is still a fantastic company. Its primary advantage is that it uses a platform model. These models are capable of rapid growth that can persist longer than anyone thought possible. Platforms are often winner take all, so if the market is big enough, the opportunity is truly remarkable.

Just take a look at Amazon (NASDAQ:AMZN). The company is an aggregator and a platform. Anyone can build on top of Amazon, whether that means using AWS to launch a website, or creating a seller profile to begin transaction on the marketplace.

The more users Amazon has, the more value it provides. This is a key feature of platforms: they grow stronger as they scale.

Right now, 70% of U.S. internet users go to Amazon first when shopping online. The company nearly took the entire market! Investors believe Shopify can emulate this success. So far, that vision looks promising.

In some ways, Shopify is the secret Amazon. Rather than being an aggregator, the company allows anyone, anywhere to spin their own digital marketplace. Most of the time, buyers don’t even realize that Shopify is involved. The company lurks in the shadows.

But this doesn’t mean that Shopify isn’t a platform business. Its seller back-end allows any developer to enhance its capabilities. More users increases demand for more tools, which attracts more developers. That enhances the platform further, attracting even more users.

This is the same virtuous cycle that Amazon benefits from, and the opportunity set for both companies is well into the trillions of dollars.

Bet on Shopify stock?

Even the best stocks become overvalued. Shopify’s growth will continue, but has the multiple overstretched itself?

Citigroup analyst Walter Pritchard notes that “top-line drivers and trends are undeniably attractive with shelter in place fueling e-commerce demand,” but warns that the valuation “leaves little room for upside.” He concludes that “valuation work suggests there may be too much in the stock.”

Barclays analyst Deepak Mathivanan also loves the company, but “valuation keeps him from recommending the stock.”

There’s no doubt that Shopify stock is expensive. The stock trades at 60 times sales. Amazon only trades at five times sales. Tesla trades at 12 times sales. Even cybersecurity firm CrowdStrike trades at just 33 times sales.

Investing in Shopify today is a difficult choice. The business is growing like a weed, and likely will do so for another decade or more. But the valuation has clearly caught up to it.

If you’re a long-term holder, the high premium is likely worth the cost of admission. But if you want to emulate the rapid gains of the past, you’ll need to search for the next Shopify.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon and Tesla. Tom Gardner owns shares of CrowdStrike Holdings, Inc., Shopify, and Tesla. The Motley Fool owns shares of and recommends Amazon, CrowdStrike Holdings, Inc., Shopify, Shopify, and Tesla and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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