Cathie wood has increased her shareholding in Shopify Inc.
Wood’s confidence in the financial prospects of the ecommerce leader is evident by her purchase of more than 164,000 stock shares over the last two weeks.
Shopify has now become the biggest holding of ARK Invest’s flagship fund ARK Innovation ETF(ARKK).
Wood is optimistic, but I caution you against buying Shopify at the current price.
Shopify’s growth is impressive
Shopify has experienced rapid growth.
This company is gaining market share at a faster rate than the entire e-commerce industry.
Shopify’s focus on operational efficiency and growth has been a major factor in the company’s success.
The company increased its cash-flow margin in the second quarter by a staggering 1,000 basis points.
Wood’s investment in Shopify could also be a result of its positive outlook for remainder of year.
The management expects revenue to grow by approximately 25 percent and free cash flow margins of double-digits in 2024.
Statista projects that the revenue of the online market will increase at a rate compounded annually of 9.5% and exceed $6.47 trillion in 2029.
Shopify’s market share increases seem to be well positioned for this trend. Although I agree with its long-term potential and am cautious because of valuation concerns, I do not believe that Shopify is the best option.
Shopify stock could be priced too high
Shopify is currently valued at 11 times the trailing 12 months sales.
If the revenue of the company grows by 20% annually over the next 5 years, and the operating margins increase from 11.8% in the first year to 20% after that period, the projected earnings for the full-year 2029 will be approximately $3.8 billion.
Based on Shopify’s current capitalization, which is $112 billion, this projection gives a price-to earnings (P/E), multiple for the next five years of 29.
The benchmark S&P500 trades with a P/E multiple that is lower, at 27.
Shopify stock is already priced to reflect the expected revenue growth and margin expansion.
Investors would have to be confident that Shopify’s stock will continue to hold a higher valuation than the market in five years.
Wall Street’s view on Shopify’s stock
Wall Street analysts share my reservations. The consensus rating for Shopify is “overweight,” but the average target price of $82 suggests a possible decline of about 7% compared to current levels.
Shopify also does not have a dividend yield. This could make the stock attractive for income-oriented investors.
Shopify is a fast-growing company, but its valuation at the moment leaves very little room for mistake.
You may need to exercise caution unless you are confident that the stock will be able to continue trading at a premium.
The post, Why I don’t agree with Cathie on Shopify Stock ahead of Q3 Earnings may change as new information unfolds
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