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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Sell Shopify Inc.

The company cannot defy gravity forever

May 15, 2019 | About:

When you look at the numbers, it’s hard not to see the disconnect between value and price in Shopify Inc. (NYSE:SHOP).

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 (NYSE:SQ), PayPal (NASDAQ:PYPL) 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 (NYSE:SQ) 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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About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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Pamocan - 2 months ago    Report SPAM

I think this statement: "With a little know-how... anyone can get a hosting account, install Wordpress and WooCommerce, and avoid the monthly fees from Shopify" is where you miss the value proposition of Shopify. For example, with even less know-how anyone can make a hamburger and fries at home, so by your logic the fast food industry is surely a money loser?

While what you say may be true about know-how, Shopify eliminates all of the barriers to entry for small shops (and at a cheap price) specifically so they don't need to have the technical know-how. Then once their estore is successful, they can scale up and do more in Shopify (and give Shopify more money) to make it better and better as they grow.

As far as valuation, sure it seems expensive at $260/share (the price when you wrote this), but the company continues to innovate and grow. Why do you think that can't continue? Of course it won't increase at 50% sales forever, but the runway for growth is still huge for at least a few years. Maybe it will slip up here and there, but probably nothing fatal.

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