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Why Investors Are Paying a Premium for Shopify Inc.

Why Investors Are Paying a Premium for Shopify Inc.

E-commerce services provider Shopify (NYSE: SHOP) rallied 136% in 2017, fueled by a streak of double-digit revenue growth and bottom line improvements. But that rally also greatly inflated the stock’s valuations.

Shopify hasn’t posted a full-year profit yet, but its price-to-sales ratio of 19 is much higher than the industry average of 6 for application software makers. Analysts expect it to squeeze out a slim non-GAAP profit for fiscal 2017 and 2018, but the stock still trades at a whopping 423 times next year’s estimates.

Those lofty valuations made Shopify a target for short sellers like Citron Research, which accused the company of overselling its ability to generate revenues for small business owners.

Yet Shopify weathered that storm and retained most of its gains. Let’s see why some investors are paying a premium for Shopify, and whether or not you should join them.

Jaw-dropping revenue growth

Shopify’s revenues rose 95% in 2015 and 90% in 2016, and Wall Street anticipates another 70% growth this year. That growth indicates that demand for Shopify’s services is rising as smaller businesses rush to establish an online presence.

Shopify helps these businesses design, set up, and run online stores. It also helps them process orders, payments, and shipments; launch marketing campaigns, and build customer relationships — all while gauging their performance with analytics.

Long-term growth potential

CEO Tobi Lütke claims that Shopify is built to become a “100 year” business, since companies will constantly need to bring their businesses online. Forrester Research estimates that online sales will account for 17% of all US retail sales by 2022, up from 12.7% in 2017.

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