Shopify’s business model is solid, this PM says

These days, Canadian tech darling Shopify Inc. (Shopify Stock Quote, Chart, News: TSX, NYSE:SHOP) seems like an unstoppable force. Forget trash-talking short sellers and ignore that sky-high valuation, investors keep flocking to the e-commerce company, whose share price broke through the $210 mark for the first time yesterday.

The stock’s gyrations may not be for the faint of heart, yet it’s hard to knock its business model, which is likely to look better and better as more shopping goes online, says Zachary Curry of Davis Rea.

This past month was a testament to SHOP’s resilience, starting with May 1, when Shopify’s stock fell five per cent as investors reacted to the company’s first-quarter earnings report. Although SHOP’s financials arrived slightly better than expected, the focus seemed to be on the company’s sales, which indicated a slow-down in momentum: up 90 per cent in 2016, up 73 per cent last year and now predicted to advance by 50 per cent in 2018.

One week later? Not only did SHOP take back that five per cent, it went up a further ten per cent.

Skip forward to May 22, when news broke that Adobe Systems had acquired Magento, a Shopify rival. SHOP’s share price fell by as much as 6.5 per cent that day, but has shot up 20 per cent since.

The ups and downs may be headache-inducing, but investors are best served to own and hold when it comes to SHOP, says Curry, president and portfolio manager at Davis Rea in Toronto.

“From a longer-term point of view, I think it’s a wonderful company,” says Curry, to BNN Bloomberg. “I wouldn’t necessarily be trading it back and forth, just because you will miss some of those big jumps and, correspondingly, some of the down periods.”

“But overall, more shopping is moving towards the Internet and Shopify allows smaller merchants to be able to get online and sell their product at low prices with that infrastructure. I think that that’s a pretty favourable trend,” he says.

Since 2015, Shopify has seen its workforce triple in size, now sitting at over 3,000 employees. Recent reports have it that the company is about to lease new office space in Toronto as it continues to hire more staff to accommodate its growing subscription base. The company currently has a market capitalization of over $22 billion, while it expects to produce revenues of about $1 billion in 2018.

“The valuation is definitely high, and tech stocks have been in this world before,” says Curry. “But from a business point of view, once you get that merchant online, they’re going to continue that revenue stream, and that’s a really positive way to run your business.”