Stock Up Sale
It’s not very often that you find a stock that turns $10,000 into $250,000 in a short period of time. Typically, the markets return 10% a year, and many individual stocks perform worse than that.
But every once in a while you find a stock that bucks the trend. A stock that rises dramatically in a short period of time. A stock that becomes a tenbagger many times over. A stock that fortunes are built on. Such stocks are rare, but when you find them, you can’t help but take notice. In this article, I will explore one Canadian tech stock that turned $10,000 into $250,000 in a mere eight years.
Shopify
Shopify Inc (TSX:SHOP) is a Canadian technology company that went public in 2015 for $3.49 per share. Its stock is now $90.73, meaning the return since the IPO has been about 2,500%. If you invest $10,000 at a 2,500% cumulative rate of return, then you end up with $260,000. That is, the $10,000 you started with, plus a $250,000 capital gain. So, you’d be up $250,000 by buying SHOP at its IPO and holding it until today.
Why it rose so quickly
There are many reasons why Shopify’s stock rose extremely quickly.
The most significant of them is the simple fact that the underlying business grew almost as quickly. In the period since its IPO, Shopify’s revenue growth rate has typically been around 40% to 50%. In the 2020-2021 COVID lockdown period, it grew at 90% year over year! Since then, Shopify’s sales growth has slowed down, but it’s still 35%, which is way above the average rate of growth. Additionally, Shopify has delivered three consecutive quarters of positive free cash flow, and that metric is growing as well.
Can it keep up the momentum?
It’s one thing to note that Shopify’s stock rose a lot in the past, but quite another to say that it will do so again in the future. SHOP is a very expensive stock, which means that a lot of the company’s future growth is “priced in.” At today’s prices, Shopify trades at:
- 127 times analysts’ estimate of next year’s earnings.
- 13.5 times sales.
- 11.5 times book value.
- 471 times operating cash flow.
- 667 times free cash flow.
This is an extraordinarily expensive valuation. So much so that it’s a dealbreaker for many investors. Had Shopify managed to keep up its 90% COVID-era growth for a few more years, it may have “grown in” to a valuation like that seen above. But, in fact, the company’s growth has slowed down.
Foolish takeaway
Shopify is an impressive company in many ways. It has rapid growth, a charismatic leader, and positive free cash flow. It’s an impressive package. But the cold hard truth is that a lot of this information is priced into the stock already. Trading at 667 times free cash flow, it is a truly pricey name. That doesn’t mean some investors won’t do well with it, but I’m personally going to hold off on buying this stock for the time being. For a value investor, this one’s a tough sell.
