Shopify could be the next Nortel, this fund manager says

The FOMO is deadly when it comes to Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), which has zoomed up the charts and surpassed everyone’s expectations for the Canadian e-commerce name. Despite the gargantuan run though, we don’t hear much Shopify criticism.

Until now.

The wise investor shouldn’t worry about missing out on the biggest thing to hit the market this year,  says Barry Schwartz of Baskin Wealth Management, who thinks this one could end up imploding and taking investors down with it.

“The bottom line is that it’s got a higher market cap than the banks,” said Schwartz, chief investment officer of Baskin, in conversation with BNN Bloomberg on Thursday.

“We all know that bad things happen to companies that have the highest market caps and you’re not a bank —BlackBerry, Potash Corp, Valeant, Nortel- so this is scary.”

“We all know that bad things happen to companies that have the highest market caps and you’re not a bank —BlackBerry, Potash Corp, Valeant, Nortel- so this is scary.”

Shopify posted impressive gains since it went public in May of 2015, starting at C$28 and climbing above C$200 per share by the end of 2018. But nothing could compare to the hockey stick-like gains over the past eight months, where SHOP spiked almost unabated to the C$500 mark and beyond. Currently trading at C$514.00, the stock is now up 173 per cent for the year.

Schwartz says part of the upswing might have to do with a loss of interest in the cannabis sector, which has undergone a dramatic pullback in recent months, leaving room for investors to turn to Canada’s tech darling.

“Astounding price move. A couple of months ago when it was C$350 I stupidly said, ‘Look at that valuation. How could anybody buy the stock,’ and now it’s 50 per cent [higher]. I don’t blame investors, [who say] cannabis is not working, so let’s move on to the next exciting thing,” Schwartz said.

“This is one that we totally missed. We know about the story, it’s a fantastic story but there are no profits there and so for us, we have a screen and a checklist and the final thing on the checklist is, can we buy it at a reasonable value — I can’t come up with a reasonable valuation of Shopify — I couldn’t come up with it at C$350,” he says.

Shopify criticism: Barry Schwartz says there’s no justification for Shopify’s current valuation and investors should stay away from SHOP stock…

Still without a profit, Shopify passed the $1 billion mark in annual sales earlier this year and continues to impress on a quarterly basis. SHOP delivered its second quarter on August 1, showing revenue up by 48 per cent year-over-year to $362 million, higher than analysts’ consensus estimate of $350.5 million, while at the same time management raised its revenue guidance for 2019 to between $1.51 billion and $1.53 billion. SHOP’s adjusted earnings were $0.14 per share compared to the consensus expectation of $0.03 per share. (All figures in US dollars unless noted otherwise.)

Schwartz says that even with online shopping continuing to take a larger piece of the commerce pie, there’s no justification for Shopify’s current valuation.

“Shopify has no profits and they’re obviously taking the leftovers from Amazon and they’re trying to compete,” he says. “They’re now building fulfillment centres, and, yes, online retail is a thing, but the valuation is just too rich for my blood.”

“I’m just going to ignore it. Hopefully, investors do well on it but I’m not going to touch it,” he says.