Shopify (TSX:SHOP)(NYSE:SHOP) defied expectations this year. The tech sector in the TSX saw great progress this year during and after the pandemic. When all other sectors were suffering, the tech was soaring. A few tech stocks doubled their share price during their recovery run, but Shopify went even beyond that.
After crashing in mid-March, the company was quick to recover. It regained its start-of-the-year valuation within two weeks and its pre-pandemic valuation within 45 days. After that, it grew explosively. From mid-three-digit valuation, the company started trading in the four digits by May. If we compare its current valuation to its start of the year price, the company grew its market value by almost 146%.
Shopify’s insane growth It’s not difficult to see why Shopify grew at such an insane pace. The charm of the tech sector staying afloat when everything else was down, the explosive increase in e-commerce sites’ demand, and Shopify’s reputation as a growth monster all combined to make it one of the hottest, most expensive stocks currently trading on the TSX.
And even though the sales are increasing, neither company’s sales numbers or its assets are anywhere near its $136 billion market cap. Its forward price-to-earnings is 291.6 times, and the price-to-book is 20.7 times. The enterprise value-to-sales ratio is almost 50 times. Suffice it to say that the company has grown way out of its skin.
Right now, what most investors are thinking about is whether or not this growth is sustainable or if the company has grown far too overvalued and is bound to see a brutal normalization. The problem is that in the current economy, there are several more variables in the equation apart from the company’s own fundamentals and investor sentiment.
The company Shopify is a fantastic company, and even if we discard the overvaluation stimulated by the pandemic, it has been an outstanding growth stock for a while now. As a fundamentally strong company in the middle of the e-commerce boom, it might be able to stay with the current valuation now. Unless something drastic shakes investor sentiment around the company to its core, it might be able to sustain an early four-digit valuation.
The company has a solid balance sheet, mostly because it has almost no significant liabilities. It has been increasing its revenue at an incredible pace, along with its cash position and its gross profit. Operating income has been in the negative zone for the last five years, but it’s improving, and in a few quarters, we might see it entering the positive area.
Foolish takeaway If you already have the company in your portfolio and unsure whether you should sell it or wait, selling it might be the right call. If the price starts to normalize, it’s highly likely that a sell-off frenzy might ensue, and people might start dumping Shopify back in the market in order to realize as much in capital gains as possible. The risk of the stock going down is a bit higher than the prospect of it rapidly growing again.
The post Shopify (TSX:SHOP) Stock up an Insane 146% in 2020: Will it Finally Come Down? appeared first on The Motley Fool Canada.
Fool contributor Adam Othman owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.
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