If you bought the IPO, congratulations. But time’s up for Shopify (Shopify Stock Quote, Chart, News TSX:SHOP).
With the market’s growing indifference to tech IPOs south of the border, this Canadian success story had better start showing substantial profits pretty soon. So says money manager David Baskin of Baskin Wealth.
Shopify had a bounce back week to kick off October, a good sign for a stock that had been on a slide since late August. SHOP gained 7.5 per cent by Friday’s close and at C$435 per share SHOP remains up a balmy 130 per cent year-to-date.
It’s unclear what has been dogging Shopify’s share price over the past month. There’s the distinct possibility that the stock had run too far but then there’s also the seemingly shifting investor climate when it comes to high growth tech stocks.
Shopify IPO pricing was hotly debated, but the stock is up more than 10x since…
Superstars like Amazon, Facebook and Google are doing fine, although 2019 has been a challenge on a number of fronts, with trade and regulatory concerns rubbing off some of their shine and effectively keeping them from returning to the highs set over the summer of 2018.
But while the FAANG companies are all proven winners, now printing gobs of cash on a quarterly basis, it’s the newbies that have the market worried.
This year saw the public debut of highly touted names Uber, Lyft, Slack, Crowdstrike and Peloton and, with the exception of Crowdstrike which is hanging in there, they’ve so far all been flops.
Worse, real estate company to the startup community WeWork had to withdraw its registration to IPO last month due to concerns from investors about the company’s finances, steep losses and leadership, all of which eventually led to CEO Adam Neumann stepping down.
The mood seems to have changed, says Baskin, to one of impatience with the tech model of high growth at any cost.
“When tech companies go public, they’re sold on growth — it’s all about growth and nobody cares about profits. At some point, people say, ‘okay, now let’s see if we can justify this valuation based on an ongoing stream of profits that we can see heading into the future,” says Baskin, president of Baskin Wealth, to BNN Bloomberg on Friday.
“Shopify, in my view, has reached that transition point, that they have to now, ‘show me the money.’ They have to make some profits and justify what looks to be a pretty high price,” he says.
“It’s one of the great Canadian tech stories, with a growing presence in the United States and really seems to be doing well. The question for Shopify is, does it have the legs to become a permanently profitable company?” Baskin says.
Shopify last reported its earnings on August 1 where it beat analysts estimates for both earnings and revenue. SHOP posted earnings of $0.14 per share on an adjusted basis, compared to the consensus estimate of $0.02 per share, on a top line of $362 million, also better than the forecasted $350 million and representing a 48 per cent year-over-year increase. Shopify’s net loss for its fiscal second quarter was $28.7 million, which compared to a loss of $24.0 million a year earlier.
Baskin says that, in a way, Shopify was lucky enough to IPO when it did back in 2015.
“Would it be able to go public today? Probably at a lower price than it did. Would it be able to justify the price it’s at now if it went public today? I doubt it,” Baskin says.
“It has the benefit of being an earlier entrant to the market where growth was still the thing, but they’re going to have to start proving to the market pretty soon,” he says.