Shopify shares have plunged 50 per cent since November.Adrian Wyld/The Canadian Press
After listing on the Toronto and New York stock exchanges in 2015, Shopify Inc. SHOP-T assumed the mantle of Canada’s next tech darling. Its hugely popular cloud-based commerce platform generated quarterly financial results that regularly beat analysts’ expectations and sent its stock soaring even as valuations reached stratospheric levels. But now the shares have plunged 50 per cent since November: Is yet another Canadian tech champion falling by the wayside – or is it time to buy the dip?
Shopify was so richly valued for years that such a tumble always seemed imminent. Indeed, short seller Citron Research vowed on Twitter in the spring of 2019 to give US$200,000 to charity if, in a year, the stock price was “higher than today” – it was then around US$200. It blazed higher almost without interruption to reach US$1,750 by November of 2021. (The tweet promising the donation appears to have been deleted. Citron founder Andrew Left did not immediately respond to an e-mailed question from The Globe and Mail on Monday as to whether the donation had been paid.)
Citron Research did announce in early 2021 that it was quitting short selling, so it likely missed the recent collapse in Shopify’s price. Nor did the fall have much to do with company-specific fundamentals, as envisioned by the former short seller. According to many analysts, it was, to use a description from Siti Panigrahi of Mizuho Securities, a “macro-driven sell-off” tied to impending hikes in interest rates and the anticipated winding down of the COVID-19 pandemic (which had driven many people to set up online businesses).
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Currently, an army of 41 analysts cover Shopify (which reports in U.S. dollars). Many of them slashed their 12-month target prices dramatically on the tumble in stock price, adding fuel to the slide. Yet, their recommendations to buy edged up to 21 while holds stayed at 20 and sells came in at zero. The median price target settled near US$1,500, according to FactSet, about 80 per cent higher than the market price.
In any event, Shopify’s current valuation is a lot less scary. The ratio of share price-to-forward 12-month revenue has dropped to 22, close to half the level in the spring of 2020. The ratio of price to 12-month trailing earnings (on a GAAP, or generally accepted accounting principles, basis) declined to 32 compared with the sector median near 29.
These and other valuation metrics may still seem high to many. Yet, Shopify has a track record of thriving in adverse macro environments. If the economy tanks under higher interest rates, the past record shows many of the unemployed will go to Shopify’s platform to start online businesses.
As for the expected post-COVID shift from online to in-person shopping, Shopify’s emergence as an “omnichannel” provider of cloud-based commerce could mean the transition is not all that painful. Its point-of-sale offerings and other services for bricks-and-mortar retailers should add more to the bottom line if in-person shopping picks up.
Furthermore, it is possible that the looming deterioration in the macro environment may not be all that dire, especially if the need for rate hikes diminishes as supply chains unclog and more goods flood onto markets to bring inflation down. Even so, Shopify’s continuing commitment to innovation produces a steady stream of new products and initiatives that provide fresh sources of sales and earnings.
One new initiative is international expansion. The recent partnership formed with e-commerce giant JD.com, for example, will allow Shopify merchants to sell directly to the huge Chinese market with fewer restrictions, Darren Aftahi of Roth Capital Partners said in a research note to clients. Another initiative that should be big is social e-commerce, Gary Robinson, investment manager at Baillie Gifford, said in a recent Barron’s interview. An example is the partnership with TikTok that enables Shopify merchants to sell their wares on that platform.
Shopify’s investments in partners supplying apps and other tools to Shopify merchants are making big contributions to the bottom line. More than US$3.3-billion was added to profits in the first nine months of 2021 by the gains derived from stakes in Affirm Holdings Inc. and Global-E Online Ltd. after they did initial public offerings. A bigger gain is expected when payments-processing provider Stripe Inc. transitions from private to public.
Shopify’s finances look strong. In the last reported quarter (ended Sept. 30), total cash stood at US$7.5-billion against total debt of U.S.$1.1-billion. The ratio of total debt to equity was just 9.7 per cent. Cash flow from operations over the previous 12 months registered US$489-million; revenue came in at US$4.2-billion and net income at US$3.4-billion (largely owing to the gains from investing in partners).
There are plans to build a new fulfilment network, which is a major spending commitment that will likely pressure margins for several quarters. Analysts also are concerned about the execution risk; in fact, Wedbush analyst Ygal Arounian cut his price target (while maintaining a buy recommendation) because of rumours Shopify is facing some challenges with the rollout of its network.
Another concern is insider trading. Over the past year, there was no insider buying but $60-million worth of insider selling on Canadian and U.S. exchanges. However, insider selling is not always a clear signal because the sales may have been done solely for portfolio rebalancing or consumption reasons.
Then there is the threat of competition intensifying, especially with Amazon.com. This shouldn’t be a problem for some time yet, Mr. Robinson of Baillie Gifford (a leading investor in Shopify), said in a research note. He believes Shopify is miles ahead of competition in helping merchants around the world sell their lines.
Even if that were not the case, there would seem to be plenty of room for Shopify and other market players to flourish given the size and growth potential of the e-commerce market. In the United States, e-commerce constituted just 13 per cent of retail sales in 2020, compared with 24.9 per cent in China. And within North America, Shopify’s market share has climbed past all other rivals, except for Amazon.com.
In sum, it does not appear Shopify is going to fade away any time soon. For investors with an appetite for risk, it may be buy-the-dip time ahead of the release of fourth-quarter results on Feb. 16 or on any additional weakness in price.
Larry MacDonald blogs at Investing Journey (larrymacdon.substack.com)
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