Keep Shopify off your 2022 to-do list, this portfolio manager says

Canadian tech wunderkind Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP) has started off the new year much the same as it ended 2021, with further share price declines. And while the pullback has been substantial — SHOP is down over thirty per cent since mid-November — investors might want to think twice before seizing the opportunity. So says portfolio manager John O’Connell who has a number of reasons why you should love the company but fear the stock.

“I like Shopify. Obviously, it’s a fantastic Canadian growth story and I like the growth profile of the industry,” said O’Connell, CEO of Davis Rea, who spoke on BNN Bloomberg on Friday.

“We don’t own Shopify — we’ve always focused on owning Amazon instead. A couple of observations: every day there’s an insider trading report on [Shopify] management where insiders are selling stock every day to the tune of around $10 to $15 million worth of stock a day. That’s okay, it doesn’t mean that’s a bad investment and some of these people have made incredible sums of money. [But] there’s been huge management changeover and turnover, which is also once again, not unusual when you’ve had a huge amount of growth in a company in a very short period of time,” he said.

 “The thing that’s always made us nervous between Shopify and Amazon is that while Shopify is a very sturdy alternative to being locked into the Amazon ecosystem, so to speak, there’s nothing that stops Amazon from getting in and becoming a more fierce competitor to Shopify, and we are seeing signs of Amazon talking and moving towards that kind of process,” O’Connell said.

Shopify finished 2021 with a respectable 21.2 per cent return, which was on par with the S&P/TSX Composite Index at 21.7 per cent for the year but certainly an anomaly compared to the outsized gains by SHOP in previous years. 

And while the current pullback seems to have little to do with any news from Shopify itself and more of about the broader market turning away from growth stocks with the threat of rising interest rates to be realized this year, Shopify’s pullback has caused a bit of a stir since it’s knocked the stock off the podium as Canada’s most valuable company by market capitalization. 

At currently $181 billion in market cap, SHOP is now well below returning champ Royal Bank currently at $202 billion and also a hair below TD Bank at $182 billion.

As a company, Shopify appears to be firing on all cylinders. The company posted revenue  growth of 46 per cent in its most recent quarter, the company’s third quarter 2021, delivered in late October. Adjusted earnings were down, however, compared to the previous year’s Q3 which, admittedly, makes for a tough comparison as it came in the heat of the pandemic where merchants were flocking to Shopify’s platform in droves, aiming to up their online presence in the face of storefront lockdowns. 

This past year brought a staggered return of bricks and mortar which muted somewhat SHOP management’s growth guidance, at least in reference to the outsized growth of 2020, but the company has all along maintained a strong belief in the lure of its growing group of product offerings for businesses large and small.

Along with furthering its fulfillment network over the past year, Shopify put a number of new items on display with the launch of services such as Shopify Markets for cross-border commerce, Shopify Balance money management and its point-of-sale offering POS Pro software. All that while its platform keeps growing in volume, processing $41.8 billion worth of business over its Q3 2021, up 35 per cent year-over-year.

“The strength of Shopify’s flywheel was on display within the more normalized spending environment we saw this past quarter, as more merchants used more of our platform to start and grow their businesses,” said Amy Shapero, Shopify’s CFO, in the company’s third quarter 2021 press release.

“Our results show that Shopify is executing well, giving our merchants the tools they need to compete in differentiated ways in a growing number of markets. We remain focused on simplifying commerce for our merchants so they can take full advantage of what digital makes possible and reimagine retail,” Shapero said.

But for O’Connell, it’s Shopify’s multiples that should be the ultimate red flag for would-be investors.

“It’s a very highly valued company trading at very, very rapid paces, but it trades at incredible valuations. So, you really have to ask yourself at what point if that growth profile does slow, you could see a great deal of disruption in the stock price,” O’Connell said.

“When you own these kinds of companies that are high growth, high valuation, incredibly innovative, just always make sure that you’re being very, very mindful of the amount of money that you actually allocate to this kind of security in your portfolio,” he said.