In the Canadian stock market, tech stocks are well known to offer powerful, above-average growth. However, when it comes to factors like consistency and long-term sustainability, not all growth-oriented tech stocks are the same.
There are very few that have sustained their growth for well over a decade. Others have offered exemplary growth in a far shorter time frame, but, unfortunately, they weren’t able to sustain their growth for long.
Shopify (TSX:SHOP) is one of the most prominent examples of such tech stocks that rose rapidly for several years but eventually ran into a brutal correction that eroded most of the growth they accumulated over the years. Now that the stock has gone bullish again, it’s natural to wonder how sustainable this current bout of growth is.
Stock’s performance
Between its 2015 inception and 2021 peak, Shopify stock grew roughly 6,000%. That’s over 800% growth a year, which is a number many conservative growth stocks don’t even achieve in a couple of decades. This powerful rise to the top made Shopify one of the most lucrative growth stocks in Canada, both within and outside the tech sector.
COVID boosted the already powerful growth pace. E-commerce was booming during the COVID and, to an extent, the post-COVID environment because the bulk of the global population was confined to their homes, and presented an ideal opportunity for e-commerce to thrive. While this resulted in exceptional growth, it also set unrealistic targets for the normal post-COVID quarters.
That was one of the catalysts behind Shopify’s drastic fall, but the conducive environment for the fall was already there. Many experts believed well before COVID that Shopify was highly bloated security due to a natural correction. COVID simply compounded it, and the stock lost over 80% of its valuation in less than a year.
Is current growth sustainable?
Shopify is currently one of the most rapidly growing tech stocks in Canada. It has risen over 80% in the last 12 months alone. It’s still quite overvalued and is trading at a price to book of about 10.1, but the financials look relatively promising.
There is minimal debt and a decent amount of cash and investments that may fund its operations and growth organically. Gross profit numbers are also looking quite promising.
The company is also integrating artificial intelligence into e-commerce, which may lead to exponential growth. But in addition to these positive factors, it’s also important to consider the elements that may be slowing down Shopify’s organic growth.
This includes many lower-priced competitors that are achieving a higher degree of global penetration and are rapidly growing their e-commerce market share. Shopify’s quarterly/yearly user numbers should give you a good idea of the company’s long-term viability as a sustainable investment.
Foolish takeaway
Even if the growth is not sustainable in the long term, the current bull market phase is strong enough to make Shopify an attractive investment. If the current phase can last for just a couple of years, you might experience more growth with it than achievable with more conservative growth stocks in half a decade.
