Here’s why Shopify still isn’t a Buy

For investors who’ve been waiting on the sidelines for the past few years while watching the stock zoom higher, the recent 20 per cent pullback on Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP) seems like the perfect gift-wrapped buying moment. 

Don’t be tempted, says Christine Poole of GlobeInvest Capital Management, who thinks the stock is still at risk for more trouble.

“We’ve never owned Shopify and I know it’s done very well and it’s the largest weighted stock on the TSX Index,” said Poole CEO and managing director at GlobeInvest, who spoke on a BNN Bloomberg segment on Tuesday. “[But] I’m a value-based investor.”

Canadian e-commerce giant Shopify looked to be headed for another year of pretty big gains when the stock popped over the C$2,200 mark in mid-November, but it’s been a long slide since then, bringing the falling knife down to C$1,740 per share and counting. That puts SHOP in line for about a 20 per cent return for 2021 if the stock stays where it is — still great but a ways off from last year’s gargantuan 178 per cent when business soared in the midst of 2020’s stay-at-home economy or even the similarly huge 184 per cent return from 2019.

For Poole, Shopify’s success in recent years is a testament to its status as a high-volatility growth stock, meaning that minor changes in the wind can have a big effect on the share price, sometimes to the investor’s detriment. Poole says at least a couple of factors have to be considered around SHOP for would-be investors.

“The stock had a great run and obviously through COVID it really benefited with the increase of e-commerce and they garnered a lot of additional customers,” said Poole.

“They’re still there going to post really strong growth, but the growth rate, the rate of change, may moderate, which for these high-multiple stocks tends to be a headwind,” she said. “I think maybe that’s part of the reason why the stock has pulled back. Of course, in anticipation of higher interest rates there’s always that discounting factor that causes high growth companies, their valuation levels, to pull in.”

“So, it’s a company we follow but it hasn’t reached a level where I think I would put it into our client portfolio,” she said.

Shopify wobbled in its most recent quarter where the company missed the Street’s third quarter call, with SHOP generating $1.12 billion in revenue, up 46 per cent from a year earlier, with adjusted earnings of $0.81 per share compared to $1.13 per share for Q3 of 2020. On average, analysts were expecting revenue of $1.15 billion and adjusted EPS of $1.23 per share. (All figures in US dollars except where noted otherwise.)

“The uptake of our newer offerings alongside the growth of our established ones, indicates just how eager merchants are for better ways of doing business in this new world where the lines between online and off-line are increasingly blurred and commerce everywhere is possible,” said Shopify President Harley Finkelstein in the third quarter conference call. “Over time, our growing suite of capabilities, channels and partners has fuelled our merchant success and encouraged more entrepreneurs to reach for their independence.”

Shopify said its gross merchandise volume, which represents the total dollar value of orders on its platform over a given time period, doubled from $200 billion to $400 billion over the past 16 months, while the company has also touted the strength of its fintech feature in Shop Pay and the integration of its platform with social media giants like Google and Facebook.

“We’re seeing early traction with a number of buyers checking out with Shop Pay and Facebook and Instagram growing and orders ramping up on these services for Shopify and non-Shopify merchants,” Finkelstein said. 

“We remain on track to add Shopify Payments as the processor for all Shopify merchant transactions on Facebook properties by year end. We expect this integration with Google where Shopify and non-Shopify merchants alike will be able to offer Shop Pay at checkout to be completed in the fourth quarter,” he said.

The slower quarterly growth — Q3 year-over-year revenue growth of 46 per cent was down from 57 per cent over the second quarter 2021 and from 110 per cent over the first quarter — may have the market taking a pause on the stock. 

Meanwhile, Goldman Sachs launched coverage of Shopify this week with a Neutral rating, saying the next few quarters may also be lower in terms of overall growth. Goldman Sachs analyst Gabriela Borges said Shopify is well-positioned over the long term with its huge $200-billion total addressable market and opportunities to expand its platform but that 2022 might see relatively less in the way of growth.

“Our long-term positive view is balanced by near-term dynamics: 1) We believe it will be two to three quarters before GMV growth re-accelerates, in the context of a normalization in demand post a pull-forward in e-commerce penetration during 2020/2021. 2) We expect EBIT margins to trend down in 2022 as Shopify invests in strategic initiatives to reinforce its platform at scale,” Borges wrote in a coverage initiation report on Monday.

“While we view initiatives such as fulfillment as solving a critical pain point at customers, they will likely require continued elevated investment. We believe the stock will likely be range bound in a period where growth is decelerating and EBIT margin is trending lower,” Borges wrote.