Avoid Shopify Like the Plague

Shopify (NYSE: SHOP) has an incredible service, helping small businesses process payments, but unlike a recent Fool.com article might mislead you – the company does not have a wide moat. Online, there are a massive amount of competition in the payment processing game. A LOT. Switching costs are not as big of a deal as in other industries either.

The company has been a publicly traded company for about two years now. Stock has been on a roar. May 2015 it was at ~$28. Today it’s at $72. That is good for a $6.5 billion market value. All this for a company losing $35 million a year on $389 million in sales. Spotify isn’t even cash-flow positive.

Even if we take the extreme valuation of market leader – PayPal (NASDAQ: PYPL) – who does $10.8 billion in sales, earns $1.4b and is valued at $50 billion. That’s 38x earnings, 5x sales. Shopify is priced at north of 17x sales, zero earnings.

Can you see the disconnect? 

The market (e.g. traders, institutions, Fool.com contributors) have overvalued Shopify, it’s that simple. Here’s the deal, Shopify’s stock could keep going up despite the disconnect. That’s why I stay far away from short selling. Look at how Bill Ackman got clipped with his Herbalife short. He may be 100% right – does not matter.

Bottom Line – Circle back to Spotify in 5 years.

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