Shopify (TSX:SHOP) may have been Canada’s tech wonder-stock over the past year but there are plenty of naysayers around who see red flags, the first of which is SHOP’s sky-high valuation, says Bryden Teich of Avenue Investment Management, who argues that not only is Shopify too expensive, there’s little reason to think that positive earnings are on the horizon, either.
Last week at Shopifys annual Unite Conference held for developers and partners in Toronto, company executives showcased a number of new product and service offerings aimed at creating a more agreeable experience for its entrepreneur merchant customers, including a bricks-and-mortar location said to be opening later this year.
“It is kind of weird that a company that was forged in the fires of the internet commerce is having a physical store, but it is a bit of a canvas for us to do some cool experiments,” said chief operating officer Harley Finkelstein to the Globe and Mail.
Shopify’s share price hit a record high in March, briefly reaching above the $200.00 mark, only to tumble almost immediately, in part due to investor response to short-seller Andrew Left’s second attack on the company in six months. Left’s critique was that Shopify’s interests are too tied to its customers’ use of Facebook as a marketing tool and, thus, as Facebook is facing concerns over privacy and potential regulatory pressure, Shopify’s fortunes would be impacted.
Teich says that some of the concerns over the company’s viability are legitimate.
“No earnings, no free cash flow, still investing heavily in the business and really no visibility on positive earnings looking out the next two years — I look at a company like this and say, there’s room for these kinds of businesses going forward, [but] it’s nowhere near anywhere close to a valuation level that we would feel comfortable,” Teich said recently on BNN Bloomberg.
“Just even in comparison, Amazon trades at three times sales — that’s expensive and this is at 12 times sales. It’s incredibly expensive,” he says.
Along with Left’s criticism, investors have reacted negatively to Shopify’s recent quarterly earnings report, which indicated a slow-down in gross merchandise volume growth. Even as the company beat expectations on revenue, coming in with a Q1/18 topline of US$214 million, the 68 per cent year over year increase was smaller than the previous year’s first quarter, while the company showed a loss of US$15.9 million or 16 US cents per share.
“They’ve done a really good job of growing their business model [and] partnering with Amazon. What Tobias Lutke has done here is really great,” says Teich. “But if you look at any relative valuation method, you’re trading from anywhere from ten- to 11-times forward sales.”
“There’s a lot of concern that they’re churning a lot of their clients very quickly for the type of business that they provide,” he says. “If you bought the IPO at $32.00, you’ve done very well.”