When you look at the numbers, it’s hard not to see the disconnect between value and price in Shopify Inc. (SHOP, Financial).
While Shopify’s surging revenue continues to impress investors with 55% year-over-year growth, the company is losing more money every year. Granted, it has plenty of cash ($2 billion) and very little debt ($100 million), so the company is not at risk of growing itself out of business. Maybe it can use the Amazon method, but more than likely, one slip up and the tide rushes back out.
Shopify is an e-commerce platform that makes it easier for small businesses to sell their products. And, since most small businesses are not very good at programming (yet), owners turn to Shopify for help selling, managing and marketing. In turn, Shopify charges up to $300 a month plus processing rates that are in line with Square (SQ, Financial), PayPal (PYPL, Financial) and Stripe, at 2.4% to 2.9%.
Traditional small business solutions providers should be frightened, but the market is huge and relatively easy to get into. With a little know-how, which is what most younger business startups will likely bring to the table, anyone can get a hosting account, install Wordpress and WooCommerce, and avoid the monthly fees from Shopify.
But what makes Shopify a go-to service is the all-in-one support. Being able to speak with someone when things go wrong is not an expense to overlook as a business owner. Since you’ll be paying for processing fees anyway, the $30 to $300 a month is a nominal expense.
As a service, Shopify is awesome.
As an investment, not so much.
Despite the company growing sales from $24 million in 2012 to $1.18 billion in the last 12 months, it still spends more than it generates in operating cash. Shopify is expected to turn a profit this year, with an earnings outlook of 50 cents a share. What happens if it doesn’t? What happens when explosive growth slows down? When the economy turns and all the small businesses it relies on also start to see lower sales? The domino effect will not be pretty. It’s only a matter of time before it happens. And, if you own the stock at 23x sales, you’re going to feel a lot of pain.
If you’re looking for a company in the small business solutions space, look at Square (SQ, Financial) instead. It offers the same if not better service offering as Shopify, but with lower monthly fees, and a free option for online shops. The company is also free cash flow positive and priced at just 7x sales. Both are growing fast, but Square is the leader. It usually makes more sense to pay less for the leadership position.
Disclosure: I am not long Shopify or Square.
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