Many expensive tech stocks have driven the broader markets higher in recent months. It seems so long ago, investors were worried about the possibility of faster rate hikes, as warm inflation data rolled in, sending 10-year Treasury bill rates to flirt with the levels of 2%. Indeed, higher rates are an enemy of growth. Now that the situation has turned and rates continue to descend towards 1%, it seems that whatever was hindering growth investors has been ignored.
Are growth investors lowering their guard as rates move in? Or could the bond market experience calm before the storm?
Indeed, investors would be wise to recognize the uncertainties inherent in this pandemic environment. The COVID-19 crisis is not yet over. And various health experts may be on the side who believe the pandemic could take a drastic turn for the worse, as new variants are discovered.
Today, it’s Delta that worries investors. Tomorrow, interest variants like Lambda could surprise the steps. On the flip side, the Fed could produce a shock in its next few minutes if it takes a more hawkish tone, even in the face of lingering uncertainties from COVID-19.
Indeed, now is not a good time to be complacent, especially with valuations in the upper end of the range for a plethora of high-growth names. While I wouldn’t avoid the larger basket of tech stocks, I would focus on companies that have shown they can continue to raise the growth bar.
Growth stocks that could continue their incredible outperformance
Without a doubt, a name like Shopify (TSX: SHOP) (NYSE: SHOP) seemed almost untouchable in the heat of panic earlier this year. Higher rates were a serious threat, as was the e-commerce giant’s pandemic tailwinds dwindling. Today the action has managed to reach new heights.
Yes, lower rates are one of the main reasons Shopify’s inventory is no longer in the gutter. But it’s the executive’s execution ability that in my opinion makes this name a great choice if you can handle extreme price swings.
In due course, Shopify will face an unexpected slowdown in revenue growth, as Amazon.com recently done. And the stock will take a hit to the chin. But the company has shown time and again that it is able to recover at a fairly rapid rate.
Without a doubt, Shopify’s stock is anything but cheap at around 50 times sales. But in this kind of market, you have to pay for growth. With all of the COVID-19 variants available, things could really turn for the worse. And in such a scenario, Shopify could see the pandemic tailwinds pick up again, and its price-to-sales (P / S) ratio could easily return to all-time highs just north of 60 times.
The stupid bottom line
Indeed, the Shopify stock appears to be pandemic cover worthy of any diversified portfolio. The price tag is steep, but I wouldn’t be at all surprised if it gets even higher over the next 18 months. Over the past two years, the scale of the expansion of multiple sales has been unprecedented, from about 15 times the sales to about 60 times the sales. The margin for error is minimal, but if there’s one business that can grow to be such a multiple, it’s Shopify!
The Shopify Stock post Could Get Even More Expensive first appeared on The Motley Fool Canada.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Foolish contributor Joey Frenette owns shares of Amazon. The Motley Fool owns shares and recommends Amazon and Shopify. The Motley Fool recommends the following options: January 2022 long calls at $ 1,920 on Amazon, January 2023 long calls at $ 1,140 on Shopify, January 2022 short calls at $ 1,940 on Amazon, and short calls January 2023 at $ 1,160 on Shopify.