Shopify (NYSE: SHOP) is a stock that is polarizing the markets.

Analysts hate it because they missed the run-up while retail investors love it because the stock is making them money.

Now with the stock sitting at over $700/sh, up 140% in the last six months we think its time to look at both the bull and the bear case for this company.

The Bull Case

The bull case comes down to revenue growth and the multiple investors are willing to pay for that growth.


If we look at Shopify’s trailing price to sales multiple we can see its already surpassed Amazon’s peak from the dot com bubble.

We live in different economic times now so this is not a fair comparison, but it does tell us investors are very very positive on the future of Spotify.

Shopify’s price to sales multiple is close to the highest you can find in the stock market for any legitimate company with a real business model, only tied with digital video darling Zoom (NASDAQ: ZM).

Shopify is Priced Like the Next Amazon

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Expensive multiple aside, investors think this company has years of 30% yearly revenue growth ahead of it.

While revenue growth is one piece of the puzzle, the multiple is just as important.

Spotify traditionally traded at 20x trailing price to sales until it went into the stratosphere in 2019.

Other fast-growing tech stocks also trade at forward price to sales multiples between 20x-30x.

Multiples, Growth and Profitability of Software Stocks

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So lets assume Spotify will also trade at a similar multiple over the long term while also growing 30% a year.

The potential future stock price looks like this.

Stock Price with 30% Annual Revenue Growth

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This is the bull case visualized.

If Shopify can maintain the current sales multiple while also growing, there is massive potential upside even with the recent run in the stock.

However, in the near term, the stock price all depends on the multiple holding in.

If the multiple should fall even to 30x sales from 40x, still a very high number, the stock will be flat to down for the next 2 years.

Multiples are directly related to growth, so Shopify will have to keep growth humming and fight the long term trend if it wants to maintain a 40x+ multiple for much longer.

If it can keep the multiple above 30x while growing, the stock will be worth over $4,000 in 10 years, a 20% annual return.

Sales Growth has Picked up Due to the Coronavirus

The Bear Case

The bear case also centers around the growth rate and how many times sales investors are willing to pay for this stock.

If the multiple or the growth rate of revenue fall for any reason, the market will not be kind to this $700 stock.

The Coronavirus is definitely stoking new sales as brick and mortar businesses are forced to quickly create virtual storefronts to reach customers stuck at home.

However, once the lockdown subsides, growth should continue falling, which is normal as a company grows and scales.

What is key is that Shopify maintains growth in the 20-30% range year after year.

If growth falls below that, the multiple is no longer justified and could fall dramatically taking the stock price down with it.

At the current stock price investors are betting on continued rapid growth and perfect execution, a risky strategy historically. 

SHOP Sales Growth Looks Like Early Amazon

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Shopify has been extremely aggressive about growth, generating big losses and ramping up cash advances to its own customers so they can get started and generate sales which eventually comes back as revenue for Spotify.

The company is already taking losses of 10% on these advances and continues to run the risk that struggling small businesses could default at higher rates than expected.

Writeoffs would hurt both revenue and the lending portfolio acting as a double hammer blow to growth.

Investors need to watch the size of the cash advance portfolio closely for signs of cracks in Shopify’s medium-term business model.

Momentum Says the Stock is Overheated

If we ignore the fundamental valuation for a minute and focus only on the movement in the stock price, things are looking overheated.

On a rolling 6 month basis, the stock is only 15% away from tying its all-time performance record of up 170% in 6 months.

Typically after the stock runs this hard we see a period where the stock goes nowhere.

Investors rarely lose money over a 6 month period, but losing out on gains elsewhere can be just as bad.

Even if the stock has amazing long term potential, now does not look like the time to establish a large position.

Patience will be rewarded.

Stock Momentum Close to All-Time Highs.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.