The bears are out; is Shopify still a buy?

Naysayers are fueled by the fact that Shopify’s 2018 revenue exceeded $1 billion. Too fast, they say. But those who deride Shopify and its meteoric rise may do so at their peril.

In the heyday of Canadian technology stocks, let’s say most of the nineties and early aughts, giddy investors chased stocks, led by Nortel and followed by a constellation of bright and not-so-bright shooting stars. Led by Nortel, they flew too close to the sun and soon crashed and burned.

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If you build a better mousetrap, the world will beat a path to your door.

Not since the very early years of the 21st century have investors displayed such enthusiasm for a technology stock. Except for the last year or so, when Shopify (TSX—SHOP) began its rise to over a billion in sales and became the go-to, internationally-recognized e-commerce store. From $150 when it IPO’d in 2015, the stock has reached the stratosphere, recently closing at over $400 per share. With an international workforce of 4,000 and forecasted revenue of $1.5 billion for 2019, Shopify stock seems to have no ceiling or down side. But is that so?

While a majority of analysts are on the bandwagon, there is no shortage of skeptics. “Sooner or later, Shopify will fall to earth with a very loud thud,” says one analyst. But based on what appears to be still-skyrocketing revenue and a dearth of competitors, many analysts think the company will still scale enormous heights and spectacular highs in the immediate years ahead.

The story so far

Shopify is a hosted enterprise platform that started out as a plain vanilla e-commerce site selling snowboards, called Snowdevil, in 2004. Snowdevil became less about selling snowboards and more about scaling a platform for other merchants to sell goods online. Today, almost 800,000 merchants use Shopify, mainly because it’s affordable (as low as $9 a month, $29 for Basic Shopify, $299 for Advanced Shopify Plus), lets someone else do the hosting that is secure, and has built-in marketing tools. In 2018, Shopify topped one billion dollars in sales for the first time.

Says one analyst: “We would be very surprised if 2020 revenue does not exceed $2 billion. We expect international expansion and better-than-expected merchant additions position the company for continued revenue outperformance, as evidenced by the rise in guidance for 2019. I set a target of $US280 (NYSE—SHOP) and see it as a buy.” Those comments were made late last year. The stock has recently been trading above $US300.

The company has been genuinely innovative from the get-go, launching a Shopping Cart system that boosted revenue to $100 million and later, rolling out its annual Build-a-Business contest. In 2012, seven years after the company was founded in Ottawa, it was named Canada’s smartest company by Profit Magazine. It was selling $740 million worth of product. By 2014, more than 80,000 customers were using Shopify. More than $1.6 billion in sales triggered rumors of an IPO. Then, deflecting talk that it would soon flame out, COO Harley Finkelstein said: “We want to build a company for the next 100 years.”

Positives abound

Shopify is ideal for high-traffic, high-customization sites; it’s cheaper than self-hosting and web development retainers. If traffic fluctuates wildly, its costs to a retailer are more predictable than budgeting for bandwidth, servers or cloud-hosting fees. This is extremely important, as many believe that the key issues of scaling traffic should be marketing and inventory, not whether servers are handling the increased traffic. Another big advantage is the predictability of support for retailers, as the company offers a dedicated account manager who manages everything from development to bug fixes.

When a retailer wants to go international, the company’s new Shopify Plus platform has the built-in tools to enable rapid deployment of international sites, which feature geographic targeting, currency and language options. Approximately 25 per cent of Shopify’s merchants are outside the core English-speaking markets of North America, Great Britain and Australia. The company intends to improve spending on international expansion, brand awareness on market channels and bulk up the product offering.

Other positives are trends in e-commerce, digital payments, social media, the growth of the entrepreneurial economy, Shopify Payment, Shipping, and Capital, and 13 per cent interest it collects from merchants it advances cash.

Shopify has enormous international growth potential. Its growth rate is about three times the e-commerce market and has averaged 80 per cent since 2015. It is the market leader for small and medium size business e-commerce enablement. As well, Shopify is an operating system for retail rather than a software suite, so it’s valued as a platform company.

Skeptics point to too much too soon

Yes, there are naysayers. The primary criticism is that Shopify does not have a full-fledged, feature-rich content management system. However, it does have built in blogging tools, a page management system that allows you to build an info-rich site that can compete in the content-marketing world.

Many too believe that all the good news has been priced into the stock. The pace of innovation may be slowing. Other bearish signs are relationships with Amazon, Facebook and eBay, which may sour, and being price undercut by grey market suppliers shipping cheap products from a developing country to the US.

Naysayers have undoubtedly been fueled by the fact that Shopify’s 2018 revenue exceeded $1 billion (too fast, too quickly), an EPS of $50; estimated monthly revenue increase of $45 million; estimated merchant solution sales of $969 million; and revenue estimates that will exceed $2billion. Negative too is the commoditization of platform technology.

Nevertheless, you might say that those who deride Shopify and its meteoric rise do so at their peril.

This is an edited version of an article that was originally published for subscribers in the June 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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