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Shopify Stock or Constellation Software: What’s the Better Buy?

Image source: Getty Images
Image source: Getty Images

Written by Joey Frenette at The Motley Fool Canada

Shopify (TSX:SHOP) stock has been far choppier than the market averages of late. After enduring a painful collapse, it appears that Shopify stock has bottomed out and could be in a spot to make up for lost time over the next 12-18 months. Sparked by a stellar round of quarterly earnings results and a strategic pivot, investors are pounding the table on the e-commerce firm once again.

In prior pieces, I’ve warned about chasing Shopify stock on the back of the latest earnings jolt. Many analysts also downgraded the stock over the considerable amount of appreciation that occurred in such a short window.

As a new investor, it’s always tempting to buy a stock after a euphoric move. However, doing such can result in sub-optimal results over the short term. Nobody wants to let a hot stock on their radar “get away.”

That said, I think it’s far safer for new investors to wait for a hot name to come in than run the risk of accumulating huge losses should a trade reverse in a hurry. Remember, a stock that pops 30% or more in a few trading sessions can easily fall by such a magnitude and at a similar speed.

Shopify stock: Too hot to handle — again?

Hot stocks can be too hot to handle. And it’s your job to ensure you’re not positioning your portfolio in a way such that it can’t recover from a steep drop. Now, market corrections and bear markets can always drag your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio into the red. But if you’re sticking with what you deem as bargains, rather than chasing the heat, you’ll be in a spot to get back on your own two feet, perhaps quicker than others around you.

If a valuation makes no sense, you don’t need to place a bet. Further, you don’t even need to watch it if you can’t understand a business and what the future growth profile entails.

Shopify recently pulled the curtain on its point-of-sale (PoS) offering. That market seems a tad competitive to be much of a needle mover for the e-commerce software behemoth. In any case, I like the options that the firm is exploring as it looks to return to glory.

At this juncture, Shopify still seems to be a tad on the pricy side. The stock goes for just over 13 times price to sales (P/S). That’s not nearly as expensive as it was during Shopify stock’s magnificent 2021 run. However, I think the patient may be able to snag shares at south of 10 times P/S. Perhaps a market-wide pullback could bring forth such an opportunity for those who missed the May jump in the name.

Constellation Software: Looking to the stars for growth?

At this juncture, I think there’s more value to be had in Constellation Software (TSX:CSU), a diversified Canadian tech firm that stealthily hit a new all-time high this month. Shares have pulled back modestly to below $2,600 per share. However, I think the dip is more of a top-up opportunity than a sign to run for the hills.

The company has a proven track record for finding value in the Canadian software space. With brilliant stewards, a track record of performance, and a more modest 6.3 times P/S multiple, I view CSU stock as a more intriguing bet than Shopify at today’s prices.

Though Constellation stock won’t make headlines nearly as much as Shopify, I think the $55 billion tech titan is one of Canada’s finest companies in the tech space.

Better bet: Shopify stock or Constellation Software shares?

For now, I’m waiting for more of a dip in SHOP stock before getting in. Though Constellation is fresh off a new high, I like that name better, given its history of smoother appreciation.

The post Shopify Stock or Constellation Software: What’s the Better Buy? appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.