The math doesn’t add up on Shopify, this investor says

Does buying Shopify (Shopify Stock Quote, Chart, News TSX:SHOP) at these prices make sense? Not at all, says portfolio manager Jason Del Vicario, but then again, Amazon took the same path to e-commerce success and look at how it’s doing.

Shopify has obviously done tremendously well from a stock price perspective,” says Del Vicario of HollisWealth, who spoke on BNN Bloomberg on Monday. “Their top line is booming, they’re signing deals with Walmart and Amazon and various other tech companies and they’re doing really, really well.”

“[But] they are extremely expensive,” he says. “If you look at the value of a company as the present value of discounted future cash flows, the cash flows that Shopify needs to generate to be able to justify this share price are tremendous so there’s a tonne of growth priced into the company.”

Shopify continues to defy the odds and climb even higher, returning 33 per cent in June alone and has been moving up like a rocket in July. So far for 2020 — a year in which the COVID-19 pandemic has decimated businesses left and right — Shopify has returned an incredible 173 per cent.

Del Vicario likens Shopify’s path to that of Amazon, which also received a lot of negative press in its earlier days when profitability seemed a distant dream and investors wondered whether the company’s aggressive growth and scaling up tactics were ever going to lead to profit.

And while the growth-at-any-cost model for emerging tech companies has received more scrutiny in recent years, it’s hard to argue with Amazon’s success. For 2019, the company grew its sales by 20 per cent to $280.5 billion and net income increased to $11.6 billion or $23.01 per share, up from $10.1 billion a year earlier.

“I think people will look at Amazon and say, Well why not Shopify?” says Del Vicario. “Shopify is following a very Amazon-esque model which is that Shopify could be profitable but they’re investing heavily in R&D and the sorts of things which should only serve to widen their moat and competitive advantage.”

“And, of course, that’s a very tax-efficient way to get big because you’re not paying tax on those cash flows because you’re reinvesting them into growing the business,” he said.

“We like Amazon but, you know, let’s not kid ourselves Amazon is also relatively overvalued, and there’s certainly a lot of growth built into to that price,” Del Vicario said.

Like Amazon, Shopify’s share price has been the beneficiary of a market searching for companies which are likely to do well not only during the COVID-19 pandemic but beyond it, with sectors such as e-commerce and biotech currently receiving a lot of attention.

In Shopify’s case, with COVID-19 shutting down physical retail shops for a number of months, merchants have been flocking to SHOP’s platform as a way to keep their businesses alive. Shopify reported a 71-per-cent drop in point-of-sale gross merchandise volume for its users during the six-week period of March 13 to April 24 as compared to the prior six weeks, yet the company said its retail merchants replaced 94 per cent of that lost business through online sales.