Is Shopify the next Nortel?

Canadian investors with even a bit of grey around the temples have memories of the Nortel blowup, and it’s been a constant refrain whenever a Canadian tech company looks to be getting too big for its britches for the topic to come up as to whether we’re dealing with the next Nortel, a company that epitomized the dot-com rise and fall two decades ago and left a lot of investors with a serious tech hangover that lasted for years.

But the new breed of tech giants — the Googles, Microsofts and Apples of the world — have the revenue and earnings muscle to sweep aside any comparisons with the failed experiments of Pets.com, WorldCom and the like. And that goes for Canadian e-commerce company Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), as well. And while portfolio manager Bill Harris of Avenue Investment Management says you can put those Nortel concerns aside, the current state of the market plus Shopify’s own still-lofty valuation point to SHOP being a pass at the moment.

“Is Shopify going to be another Nortel?” said Harris, speaking on BNN Bloomberg on Thursday. “Nortel was one of those great examples where we had the 2000 sell-off and the market was just creamed. The problem was that Nortel was trading at 100x earnings and then it turns out that those earnings were fraudulent and that happened in the following year. And the other problem with Nortel was they had a lot of debt. Some of their competitors were debt free, in which case they survived and Nortel didn’t,” 

“Shopify doesn’t have the same structure of debt that would really impact the shares and it really is a truly fantastic business and it’s proven itself to be a fantastic business,” Harris said.

Nortel was the telecom and networking equipment company that was heavily pumped up in the years leading to the 2000 tech crash, with almost everyone and their uncle owning shares of Northern Telecom and then Nortel at some point. By the year 2000, the company was reporting revenue of $30 billion and its market cap stood at over $380 billion, its shares making up almost 35 per cent of the value of the then TSE 300 Composite Index of Canadian traded companies. A drop in demand for its products, a bad acquisition strategy and accounting issues were just some of the factors in Nortel’s downfall, which ended in bankruptcy in 2009.

Shopify has also had its share of detractors over the years, with short reports having knocked the stock down a couple of times over concerns about the true size of its market and doubts about its ability to compete with more well-heeled tech companies lining up within the e-commerce space. But strong organic growth year in, year out have put a lot of those concerns to bed, while the current clawback in SHOP’s share price appears to be linked to a broader distaste in the market for growth-oriented stocks.

Shopify looks to be starting another week on a down note as the market continues to punish the company now trading around $1,070 per share whereas as recently as November the stock was up above $2,100. 

All eyes will be on the company’s fourth quarter earnings report due on Wednesday, February 16, with the all-important holiday season sales to figure in on SHOP’s Q4. The company will be in tough to compete with its fourth quarter 2020 numbers which saw revenue climb at a 94 per cent growth rate, hitting sales of $977.7 million on adjusted earnings of $1.58 per share. Shopify’s most recent quarter featured revenue up 46 per cent year-over-year to $1,123 million and earnings of $0.81 per share. 

Harris says the pullback on SHOP is still not enough to make him interested. 

“This [relates to] just how much liquidity was in the market and almost this valuation bubble that we had last year, where we’re saying Shopify is a great company but oh my goodness is it expensive based on the size of its business at the moment,” Harris said. “So you’re saying that Shopify is going to be fantastic five years from now, but then you’re just guessing what the future is. So, even at today’s prices it’s still relatively expensive.”

“At Avenue, what we spend most of our time on is much more established, stable businesses, and Shopify still looks expensive to us. If it’s just trying to make money on the stock as opposed to the business we just don’t have an opinion because we think this liquidity problem is not going away, so we are still staying away from high valuation stocks,” he said.

“Even though it’s come down a lot, Shopify is still expensive. We want to make sure we are in these much more established businesses or commodity type businesses where their pricing is going up and where their margins are going up,” Harris said.