Canada’s largest company by market capitalization today is technology superstar Shopify Inc. (TSX:SHOP)(NYSE:SHOP). This company has reported incredible year-over-year growth of 87% recently, but its shares dropped last week on the news.
One might consider why a company that has consistently nearly doubled its revenue on a year-over-year basis could drop on another earnings beat like this. The reason was lower-than-expected forward guidance for growth in 2021. The company expects a rise in bricks and mortar retail to take some of the steam out of the e-commerce boom that has driven its revenue to all-time highs. Additionally, the company may expand into new markets at a slower pace than initially thought, another driver of the near-term decline we’ve seen in this stock since its earnings.
Shopify is a world-class company with a product and business model that remains extremely appealing. The company is also finally producing a meaningful profit, and is expected to grow its bottom line aggressively over the medium- to long-term. That said, this stock is priced in the nosebleeds, with a price to sales ratio of around 75. Any stock that has this much growth built in is at obvious risk of a decline, if investors anticipate even the smallest whiff of a growth deceleration over any period of time.
As such, this is a stock that finds its way into my watch list column right now rather than my buy list.
Invest wisely, my friends.
