Shopify price falls prey to inflated expectations
E-commerce firm's exponential growth tough to maintain over the long term
OK, this is very rare. A company reveals a near doubling in revenues, along with a massive jump in earnings, then promptly suffers a $15-billion loss in market value.
That was Shopify's morning on Wednesday. And it provided a sharp reminder of the distinction between the e-commerce enabler as a corporation, and its status as Canada's most valuable stock.
As a company, Shopify is doing most things right. Fourteen short years after launching its software platform for setting up and running online stores, Shopify posted annual revenues of US$2.93 billion — up 86 per cent year over year.
More than 1.7 million online retailers now rely on Shopify's technology to generate sales during a once-in-a-century pandemic. It has become a lifeline, developed, serviced and maintained by a small army of 8,500plus Shopify employees, including 1,200-plus in the capital region.
Despite the rapid-fire hiring, more than half a billion dollars spent on R&D and significant writedowns of abandoned downtown offices, Shopify posted a net income of US$320 million last year.
So, what to make of Wednesday's disconnect between company performance and share values?
Much of it has to do with investors' inflated expectations.
Consider first the impact of COVID -19, which prompted so many retailers to rush online. Had Shopify continued on its pre-pandemic growth trajectory (47 per cent), it would have completed last year with US$2.3 billion in revenues — some US$600 million short of where it wound up.
With her warning Wednesday that revenues would move up “at a lower rate” in 2021, Shopify's chief financial officer, Amy Shapero, merely recognized reality. Shopify can't keep doubling in size from a large base, especially one that popped up in such extraordinary fashion.
Before posting its financial results Wednesday, the value of Shopify's shares totalled nearly US$180 billion — about 45 times this year's projected revenues of US$4 billion.
This was based on a share price of US$1,474.
Even in the super-agitated world of successful software companies, that's a very expensive ratio. More normal, but still expensive, would be 20 times revenue — which could be achieved by adjusting Shopify's share price to less than US$650, or its revenues to US$9 billion.
Put it this way: if Shopify posts annual revenue growth of 45 per cent, it could reach nearly US$9 billion by 2023. By then, it would be able to justify today's valuation.
Shopify could actually grow this fast, but it assumes very little will go wrong. CEO and founder Tobi Lütke was asked how he intends to keep Shopify's culture intact when it's adding thousands of employees each year, with the majority expected to work from home permanently.
“You just try to make sure the next version of your company is better than the previous one,” he noted, adding that of all the iterations he has seen to date, “this one is the best one.”
Smart managers try not to be guided by the stock market's assessment of their company. Shopify to date has been very cool under pressure, consistently outperforming robust projections for revenues by sticking to its business — equipping online entrepreneurs to battle Amazon.
Shopify is the rare company that, for much of its short existence, has not had to chase after customers. The latter, especially during 2020, have come to Shopify.
It won't always be that way. Many competitors — from BigCommerce to Lightspeed
POS — are preparing to challenge Shopify's hegemony.
The next two years could determine whether they were too late to try.