Shopify: Should It Be On Your Shopping List?

| About: Shopify (SHOP)
This article is now exclusive for PRO subscribers.


Beat down IPO while difficult to value has huge growth potential in its Shopify Plus platform.

Tough competition in BigCommerce, Volusion and GoDaddy.

Although 23% lower than its IPO price, Shopify still looks pricey.

Shopify (NYSE:SHOP) is one of the few tech companies to go public on the TSX in recent years. It can be a hard stock to value at current levels because it has been trading for just under a year with no true P/E and its true potential may be unrealized as the stock has dropped nearly -23% since going public last May. Shopify is a company that allows digital retailers to launch their own high quality e-commerce site through an intuitive easy to use interface. There are tons of small businesses that are looking to get a professional website to sell their goods. Shopify currently has over 200,000 businesses supported by its platform that helped them sell over $12 billion worth of merchandise. Shopify could be a huge bargain right now considering its growth potential.

Beat down IPO has huge growth potential

Like most Canadian stocks in 2015, Shopify was oversold and declined 23% lower than its IPO price. Shopify actually beat analyst expectations in the last earnings report but still sold off along with the majority of the market. Shopify currently specializes in creating a platform for small businesses to sell their goods online. Where the growth is coming from is in looking to target larger businesses with their "Shopify Plus" subscription. Once it can lock these businesses in, then they will be collecting subscription fees which will generate a huge cash flow that will make Shopify a large dividend payer once its growth is capped many years down the road. Shopify has had great reviews from its consumers and is looking to make their platform even better going forward with features such as POS (point of sale) transactions which will increase business efficiency and revenue. By constantly improving the platform and adding new features, Shopify puts itself ahead of the curve by being able to attract and keep existing business. At current levels, Shopify is tough to value as it has been posting negative earnings, it is important to note that this is a profitable company but right now R&D is cutting into a huge chunk of their gross profit. The P/B is 8.9 which is expensive when compared to the industry average of 4.9. There is no P/E on the stock due to negative earnings and investors may want to wait until Shopify can prove that they can generate a continuous stream of increased earnings.

The risk: Tough competition and quite expensive although lower than its IPO price

BigCommerce, GoDaddy (NYSE:GDDY) and Volusion are three other big players in the field and Shopify faces tough competition from these firms. There is no stopping a business owner from switching between any one of these and the true market leader will have the best platform at a competitive price. Shopify looks pretty expensive at current levels with a forward P/E of 774.9, P/S of 9.0 and P/CF of 100.6. Shopify expects $200 million in revenue in fiscal 2015 while its market cap is $1.74 billion, that's a profit margin of just 11.5% which would theoretically give the stock a trailing P/E near 100.

If you're a young Canadian investor looking to add some aggressive growth stocks to your portfolio, this may be it as the growth may be gigantic over the next few years. However, at the current price I would not recommend doing so as I believe the stock will continue to decline going into 2016 as there looks to be no relief in sight for the TSX. You may be able to get a better entry point when the TSX isn't bleeding billions of dollars of wealth a day in its bear market. Then you may be able to add this growth prospect to your portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.