As I'm fairly new to investing, why would the 74.4 times earnings make a stock expensive? What does that actually mean? And if you could add any other thoughts on Shopify as it stands now, that would also be appreciated. Thank you.
Equity investors typically use multiples like forward price-to-earnings to justify the current share price. price-to-earnings can be in trailing (looking at historical results) or forward looking (using future consensus estimates). Forward price to earnings takes the current share price and divides it by the expected earnings per share over the next twelve months. As an equity investor, you are at a minimum concerned about growth in revenue and earnings per share (EPS) where EPS how much profit you will recieve per share held. Essentially, price-to-earnings tells you how much an investor is paying per dollar of a companies earnings. So in this case, SHOP's current share price is $110.27 while its forward price-to-earnings is 68.4x. This means that when price is $110.27, investors have to pay 68.4x what EPS is expected to be over the next-twelve-months. Equity markets have companies of all sizes and at different levels of profitability, so price-to-earnings gives a relatively standardized metric to assess and compare companies hence the expensive tag on SHOP.
We like SHOP and think it is a strong growth tech name in the Canadian market. It is certainly more expensive than NVDA but this is due to the potential future scale of SHOP's business, while it is also less profitable than NVDA.
Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in NVDA.