Something odd happened in the investing world last Christmas Eve. That was the day Shopify shares dipped below $118 per share on the New York Stock Exchange before beginning a stunning rise to nearly $282.43 Tuesday (all figures U.S.).The upshot: in five short months, Ottawa’s e-commerce technology star added $18.4 billion in market value to reach $31.5 billion, making it one of the most valuable firms on the Toronto Stock Exchange. Add to this the $2 billion in cash that now fills the company’s coffers.Owners of Shopify shares, who are gathered online and in person for the company’s annual general meeting Wednesday, are no doubt over the moon. So, presumably are most of the company’s 4,000 plus employees — about one-quarter of them Ottawa-based — who receive part of their pay in the form of shares.But what’s behind the recent surge in the value of Shopify? Equally important, can this company — which makes its living helping entrepreneurs set up and run online storefronts — sustain this remarkable pace?
The Ottawa headquarters of Canadian e-commerce company Shopify are pictured on Wednesday, May 29, 2019.
Justin Tang /
THE CANADIAN PRESS
Not all the share price jump is Shopify’s doing. Part of it reflects a statistical quirk — December was simply a lousy month for tech stocks, making even Shopify somewhat undervalued. When equity markets in general rebounded this year, Shopify was along for the ride.Shopify’s earnings report, published April 30, also provided a catalyst, but it was a measured one. Revenues were slightly better than expected and so was the projected rise offered by management for the coming year — a repeat of the pattern set by Shopify practically since it first offered share to public four years ago.Yet, underlying all of this, there has also been a change in investors’ perception of Shopify. The company’s expansion into foreign markets, the addition of multiple lines of new business (online retail apps) and the conversion of larger online retailers to its cause are looking more solid.Many analysts, accordingly, have altered their forecasts.For a taste of just how much, consider the report offered in late October 2017 by Tom Forte, the New York-based analyst for D.A. Davidson & Co., an equity research firm. In it, Forte re-emphasized his neutral rating for the stock, predicting it would actually tumble slightly over the next 12-18 months from $102.91 per share at the time.“To be clear,” Forte wrote, “our neutral rating is purely a reflection of (high) valuation and nothing else.” This was based in part on his forecast that Shopify’s revenues would hit $964 million in 2018. At the time, Shopify’s enterprise value (share price times shares, plus cash) was $11.4 billion — or nearly 12 times next year’s revenue.That’s expensive, as Forte recognized. Other analysts, including Kevin Krishnaratne of Paradigm Capital Inc., have pointed out that most of Shopify’s peers — including e-commerce specialist HubSpot — trade at a substantially less-lofty seven to nine times revenue.Yet, early this month Forte upped his price target for Shopify to $290 per share from $210. This was based on his forecast of $2 billion in sales for 2020 — representing an enterprise value to revenue ratio of 14.5. Shopify shares, he noted, were worth buying.At first glance this was counter-intuitive. Shopify’s valuation is even more expensive than in 2017 but now carries a buy rating rather than neutral. Nor is Forte alone — 18 or 25 analysts tracked by First Call have a buy recommendation for Shopify. (One that doesn’t is Morningstar, which on May 27 reckoned that Shopify shares, then trading at $275.85 were overvalued by some 30 per cent.)Part of wider optimism has to do with experience. Shopify is steadily earning respect — not least because it has topped financial forecasts for 16 straight quarters.
Tobi Lütke, founder and CEO of Shopify.
Julie Oliver /
When you extrapolate faster growth over many years, the result is profound. When Forte issued his 2017 report, he predicted Shopify’s revenues would reach $3.3 billion in 2026. His report early this month forecast 2026 revenues of $8 billion. Even more remarkable is Forte’s net profit projection for that year of $1 billion.In keeping with the experience of many young, fast-growing firms, Shopify has incurred significant losses throughout its history as it builds infrastructure, and spends a small fortune on hiring, marketing and R&D. Assuming no significant hiccups, Forte reckons company profits could finally show up next year — and we’re talking GAAP (generally accepted accounting principles) earnings, which include all expenses — and grow rapidly after that.Here, we’re getting to the heart of why Shopify’s current share price is so high. Investors and analysts alike are dazzled by the possibilities. Here’s a Canadian firm that so far appears to have done everything right. Shopify’s founders, especially chief executive Tobi Lütke, spotted an opportunity to make life easier for online entrepreneurs — and it turned out to be an extremely lucrative one. Soon more than one million merchants will be paying a monthly fee for Shopify’s enabling technology — and most will also sign up for Shopify’s other products, including apps to help ship orders, process payments and manage inventory.Shopify’s shareholders already know the firm has been a smash hit. But Ottawa and Gatineau investors know very well the risks associated with investing in technology firms. The pain of the collapses of Nortel, BlackBerry and other former stars remains all too real for many.Shopify’s current share price is based on a very sunny view of the future. It’s one that could well come to pass but anyone thinking of investing now would do well to read Shopify’s latest quarterly results, in particular the detailed analysis provided by management.The section describes dozens of potential risks facing Shopify as it expands operations on so many fronts. Among the main ones: new competitors (including from Microsoft), failure to properly manage continued rapid growth, inability to attract the right talent, security breaches, software glitches and the increasing complexity of its core technology.Investors would also do well to consider that an increasing percentage of Shopify’s overall revenue — 56 per cent in the most recent quarter — is based on how well its online merchants are doing. The corollary: any economic downturn could hurt Shopify’s revenue streams significantly.At the moment, that’s difficult to imagine. Even so, shareholders should consider this possibility as well.ALSO IN THE NEWS: Montsion defence claims ‘unacceptable state negligence’ as trial resumes with charter motion to dismiss all charges‘She has to rebuild her whole life:’ $19 million lawsuit filed on behalf of woman who lost legs in OC Transpo crashLarger class sizes will mean cutting 1,800 courses in Ottawa’s public high schools, says report