This morning, Shopify announced it had filed a preliminary prospectus supplement to its amended and restated short form base shelf prospectus from yesterday. The company says it will offer a total of 5.5 million Class A subordinate voting shares.
Tse says he was not expecting this development, but believes the aggressive move could offset short term dilution concerns.
“This morning, Shopify announced an offering of 5.5 mln Class A subordinate shares,” Tse explains. “That offering would result in 6% dilution. At an assumed US$90/share raise, gross proceeds would be ~$500 mln. Given Shopify’s $400 mln of cash on the balance sheet at the end of Q1 and positive free cash flow, the proposed equity raise comes as a bit of a surprise. And while the use of proceeds is to broadly invest for growth, we can’t help but think it signals acquisitions –and potentially even a large transaction even if what we’ve seen thus far from the Company are small tuck-in technology transactions. All in, while the transaction is dilutive in the near-term with added risk (via cost of capital and potential M&A), we believe that risk is offset by increased flexibility to drive growth.”
In a research update to clients today, Tse maintained his “Buy” rating and one-year price target of (U.S.) $100.00, implying a return of 11 per cent at the time of publication.
Tse thinks Shopify will post EBITDA of negative $800,000 on revenue of $630.7-million in fiscal 2017. He expects these numbers will improve to EBITDA of positive $31.7-million on a topline of $898.7-million the following year.
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