Shopify (NYSE:SHOP), a provider of an e-commerce platform that allows small businesses to easily sell online, currently trades at an enterprise value-to-sales ratio of nearly 70. The stock has soared 160% this year, and it's up 265% from its 52-week low. If there's a bubble in pandemic stocks, Shopify is the poster child.
The premise behind Shopify is sound – e-commerce sales growth has accelerated due to the pandemic, and many businesses need to turn to online sales to survive. If you forget about the fact that most of Shopify's customer base is comprised of exactly the kinds of businesses that fail at a high rate during an economic downturn, it's easy to justify paying a wild price for this fast-growing Internet stock.
Let me put Shopify's nose-bleed valuation into context. During the dot-com bubble, Amazon.com, Microsoft, and Cisco were three tech stocks that caused a lot of pain for many years after the bubble burst, even though all three were ultimately success stories. It took just about a decade for Amazon stock to reclaim its dot-com bubble high, and even longer for Microsoft. Cisco still hasn't, even though it's the overwhelmingly dominant provider of networking hardware and a successful company by any measure.
Today, Shopify trades at a higher enterprise value-to-sales ratio than Amazon did at its dot-com peak. The story may turn out well for Shopify in the long run, like it has for Amazon. But don't let survivorship bias fool you. For every Amazon, there were many stocks with sound premises and sky-high valuations during the dot-com boom that crashed and burned, never to recover.
A nonsensical stock price can become more nonsensical – that's how bubbles work. But as Ben Graham said, the market is a voting machine in the short run and a weighing machine in the long run. Right now, Shopify is winning a popularity contest. It won't last forever.
From article.
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