Shopify soars to Canada’s most valuable company

RBC dethroned as e-commerce platform beats Q1 forecast with US$470M revenue

Shopify Inc. passed Royal Bank of Canada Wednesday afternoon to become the most valuable public company in Canada, after the company reported first-quarter earnings and investors got a good look at how the COVID -19 pandemic is affecting the business.

The key takeaway from the earnings numbers was that Shopify remains an essential service for the million merchants that use the company’s e-commerce platform, and chief executive Tobi Lutke emphasized that point speaking to analysts on the earnings call Wednesday.

“We take our mission incredibly seriously. Shopify has banded together like crazy, because we see our job as trying to make it so more SMBS in the world survive — because Shopify exists,” he said. “That’s the role we picked for ourselves, and that’s what we’re spending all of our time on.”

Shopify has been developing new products and software features for its merchants such as curbside pickup for online orders and a new email marketing tool. It also expanded the Shopify Capital lending program to Canada and the United Kingdom, and increased the allowance for losses.

Lutke said he expects to keep developing new tools for merchants, and they will be made available quickly, even if they’re still rough around the edges at first.

The company reported Q1 revenue of US$470 million, roughly US$24 million above the top end of its forecast three months ago. Its quarter ended March 31, and the pandemic affected results.

Some merchants have been downgrading from the more expensive Shopify Plus system, or seeking cheaper subscription options within the basic Shopify e-commerce platform.

Chief financial officer Amy Shapero said there has also been a wave of cancellations, mostly from merchants that weren’t selling at high volumes.

Tom Forte, an equity analyst at DA Davidson, said things are happening so quickly amid the pandemic that it’s difficult to do the sort of normal financial modelling to assess Shopify’s performance. But overall, he said its results were positive.

Forte noted that the company extended its free trial offer to 90 days instead of the normal 14 days, which will cause a hit to subscription revenue.

Forte said his overall impression from Shopify’s quarterly report is that its platform remains essential for small- and mid-sized businesses. He said such businesses are struggling right now, and it remains to be seen whether Shopify can help carry those merchants through the tough times.

Shopify’s stock rose by nearly seven per cent to close at $1,034.42. More notable is that just after 3 p.m., its market capitalization hit $120.9 billion, slightly edging out Royal Bank of Canada as the most valuable public company in the country. At market close Shopify retained a narrow edge.

Shopify’s stock has been on a tear, climbing more than 90 per cent on the Toronto Stock Exchange since the beginning of January. Ygal Arounian, an equity analyst at Wedbush Securities Inc., said the markets are pricing in the bull case for Shopify’s future.

Software companies often trade at a large multiple of their revenue, because overhead is very low and profit margins tend to be quite high once the software is written.

But Arounian said he is concerned that many of Shopify’s revenue streams come from lower-margin lines of business such as the Shopify Capital lending program, or its nascent warehousing and shipping network.

“Their valuation is well above the average for software companies. It’s actually hard to find many, if any, companies that trade at the multiples that Shopify does,” he said. “If you’re still buying shares here, you think they will get a big share of commerce, and not just that they’ll get a big share of commerce, but they’ll be very profitable doing so.”