A good quarter and a falling share price can coexist quite happily. Shareholders tend to enjoy the combination less. That’s the tension behind the latest technology selloff, and it creates an opening for investors willing to look beyond the first red number on their screen. For money staying in a Tax-Free Savings Account (TFSA) for 10 years, I’d focus on whether the business can grow into the price I’m paying.
A decade helps, with limits
Ten years gives a company time to develop products, win customers, and turn today’s investment into tomorrow’s profit. It also gives an expensive stock time to disappoint if the business grows more slowly than its price assumes. The TFSA account won’t rescue that purchase. According to the Canada Revenue Agency (CRA), gains inside a TFSA are generally tax-free, but investment losses don’t create replacement contribution room.
I’d therefore use a TFSA for a business I can understand and hold through a rough stretch. The position also needs to be small enough that a bad year doesn’t derail the rest of the account. That’s a <a href="https://bitcomme.com/salesforce-crm-moves-to-strong-buy-rationale-behind-the-upgrade/” title=”Salesforce (CRM) Moves to Strong Buy: Rationale Behind the Upgrade”>strong way to approach a company whose customers sell everything from everyday essentials to purchases shoppers can postpone.
The checkout still earns money
Shopify (TSX: SHOP) provides the software and payment tools merchants use to run their businesses online and in stores. It benefits as those merchants sell more and use more of its services. That gives the company several ways to grow without having to become the retailer stocking every warehouse itself.
Its November 3 results showed revenue growth of 32% and a reported free-cash-flow margin of 22%. Put simply, the company produced about $0.22 of its defined free cash flow for every sales dollar. That’s a much stronger foundation than a growth story that keeps asking shareholders for fresh money to cover ordinary operations.
Yet the shares traded at $199.83 at writing, down about 8% from Monday’s close. Investors were paying a demanding price before the report. The available valuation snapshot still put the stock near 70 times forecast earnings. Rapid growth has to continue for that premium to make sense, which is why a healthy business can have a bruising morning.
Cash gives management choices
Shopify is also buying back shares. That can increase each remaining share’s ownership of future earnings when repurchases exceed new share issuance. Here’s the distinction between the money approved and the money actually used in the latest quarter. The amounts below are U.S. dollars.
