It’s too late to buy Shopify, this fund manager says

The argument for owning Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) hasn’t changed much over the years. Here’s a company that regularly blows past estimates and delivers high double-digit gains, quarter after quarter and year after year, and every time you think the upside to the stock is over, look out because here comes another run.

But while that line of reasoning may still convince some investors — perhaps even more so now that the stock has gone through a significant pullback — Brian Madden of Goodreid Investment Counsel says now’s not the time to be lured in, since neither the multiples nor the technical chart are looking too good for Shopify.

“This is a very important stock in the Canadian landscape and for a few months it was actually the biggest company in Canada, dramatically snatching that title from Royal Bank in the middle of last year as the pandemic advantaged their business and the provision of e-commerce traffic and activity, which of course is what they do.” said Madden, senior vice president at Goodreid, who spoke on BNN Bloomberg on Monday.

“Shopify remains an excellent company, and we ourselves used to own it,” Madden said. “We owned it from about 2016 to 2018 and it quadrupled or quintupled in that time frame, and then we moved on out of concerns about high expectations very high valuations.”

Shopify has dropped about 24 per cent in recent weeks, as the overall market turns away from tech stocks after an historical run in 2020. There, stocks like SHOP did exceedingly well in the COVID-19-caused stay-at-home environment, prompting people to do more online shopping and for businesses to up their online game, both of which are right up Shopify’s alley.

The company saw traffic on its platform almost double in 2020, where Shopify reported a 96-per-cent increase from 2019 in Gross Merchandise Volume, or the total dollar value of transactions, which soared to $120 billion for the year.

Revenue for Shopify’s 2020 grew by an incredible 86 per cent year-over-year to $2.930 billion, while adjusted net income grew to $491.3 million or $3.98 per diluted share versus net income of $34.3 million or $0.30 per share a year earlier. (All figures in US dollars except where noted otherwise.)

“2020 was an exceptional year of growth in revenue and adjusted operating income for Shopify driven by the unprecedented acceleration of e-commerce by COVID, which drove an acceleration in the growth of GMV and new merchants on the platform, and which increased adoption of merchant solutions,” said the company in its fourth quarter press release in February. “We believe that changed behaviours adopted by merchants and consumers in 2020 have expanded the prospects for entrepreneurship and digital commerce significantly.”

But even with all that growth, Madden says he’s not convinced.

“The stock blew through our wildest expectations last year but the concerns remain,” Madden said. “If anything, they’re greater now than they would have been three years ago.”

“The stock is certainly more expensive and certainly has higher expectations, and now on top of that it’s going to face very, very difficult comparisons if, as we expect, a return to normalcy unfolds at some point during 2021 and in fact there’s good evidence that that’s already starting to occur in the United States where they do a lot of their business,” Madden said.

Shopify itself provided a more muted forecast for 2021, saying even as the shift to e-commerce continues at a pace, the reopening of bricks and mortar stores post-pandemic is likely going to mean a drop in the rate of growth compared to 2020.

“While we expect that the first quarter will likely still contribute the smallest share of full-year revenue and the fourth quarter the largest, the revenue spread may be more evenly distributed across the four quarters than it has been historically if the rollout of a vaccine shifts more spending to services and offline shopping towards the back half of the year,” Shopify said.

For Madden, SHOP has a significant support level that if broken could spell trouble for the stock.

“The chart is not broken but the uptrend looks a bit wobbly here from our read on it,” Madden said. “There’s probably support around C$1400 which is where the 200-day moving average lives.”

“But with these momentum driven stocks the trend is your friend until it ends, as they say, and look out below if the stock cracks sustainably below C$1400. It could be quite an air pocket there.”

“Our read of the situation is that the risk is not just in the technicals and charts. The fundamental underpinnings of this company, in our view, don’t justify a C$1400 share price and so we wouldn’t be buying it here,” Madden said. “If you owned it, we’d lighten up on it or sell it, not because it’s a bad company but because it just doesn’t look like a timely stock right now, and there are too many better ideas with less stretched expectations and more compelling valuations.”