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Shopify is still not worth it, this portfolio manager says

On the surface, it seems like the deal of the century. Investors buying Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP) right now are getting a quality name at a price that’s hard to beat: almost 60 per cent off its recent highs. And the opportunity should be doubly appealing to those of us who many times over the past few years have kicked ourselves for not buying SHOP, now a household name and a virtual juggernaut in the e-commerce space.

Still… there’s reason to look before leaping, says Stephen Takacsy of Lester Asset Management, who breaks down the risks involved in buying Shopify even at these reduced rates. Takacsy thinks it’s unclear whether this stock has further downside from here.

“You never know where the bottom is on these high multiple sales stocks,” says Takacsy President and CEO of Lester, who spoke on BNN Bloomberg on Tuesday. “It’s not one we would buy necessarily because we’re a little bit more value oriented, although I guess you could argue that it’s much better value today than it was a year ago. That’s a tough one.”

Shopify reached its peak a few months ago, hitting $2,139 a share on November 19, which is just about when the general market rotation began, moving out of high-growth names in sectors like tech and into value and more defensive plays. Interest rates have been rising, which impacts future earnings for all companies but affects growth stocks more deeply since much of their present valuation stems from those future earnings. 

That puts names like Shopify clearly in the crosshairs.

“As rates go up, of course, multiples compress on these long-dated tech stocks which aren’t necessarily showing earnings today,” Takacsy said. “So, if you buy it you just have to live with the extreme volatility.”

“It’s still growing by leaps and bounds, there’s no question about that, and it is a profitable business down the road and they’re spending a lot of money growing, but to try and pin a valuation on it with any degree of accuracy is a difficult task at best,” he said.

Shopify has still been delivering exceedingly well each quarter but it appears that the tolerance for any signs of slowing growth has dropped significantly in recent months. SHOP delivered fourth quarter earnings last month which featured revenue up 41 per cent year-over-year to $1.38 billion and adjusted earnings of $1.36 compared to $1.58 per share a year earlier. Those numbers beat analysts’ expectations where the consensus calls were for EPS of $1.27 per share on a topline of $1.34 billion.

For the full 2021 year, one in which e-commerce growth continued its rapid pace of growth during work-from-home environments over the pandemic, Shopify hit revenue of $4.61 billion, up 57 per cent from 2020, while adjusted net income was $814.4 million or $6.41 per share compared to $491.3 million or $3.98 per share in 2020.

But Shopify’s management delivered a note of caution in its summation of how it expects the upcoming year to play out, saying it’s unlikely to hit that 57 per cent revenue growth again in 2022. 

“Our outlook for 2022 assumes continued secular tailwinds for entrepreneurship and digital commerce transformation against a more measured macro environment relative to 2021. While we believe that the COVID-triggered acceleration of e-commerce that spilled into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022, and there is caution around inflation and consumer spend near term, for the full year, we see economic growth supporting the continued penetration of retail by e-commerce,” said Shopify in its fourth quarter press release on February 16.

To that end, Shopify said it plans to continue building out its brand and reinvesting its profits back into R&D and expanding its sales team.

Responding to SHOP’s fourth quarter numbers as well as surrounding macro trends, National Bank Financial analyst Richard Tse said Shopify’s change in stance toward building out its fulfillment network, where the company now aims to build and run its own network, may have irked some investors and contributed to the continued slide in SHOP’s share price post-Q4.

“The change in approach is the result of what it’s learned from prototyping its fulfillment model that had them concluding they would need such change to ensure quality two-day delivery for 90 per cent of the U.S. The reality is that such a change is different from the initial plan for fulfillment, and in the context with the market for tech stocks today, the change is obviously viewed as a blemish,” Tse said in a February 16 report.

With his update, Tse maintained his “Outperform” rating on Shopify but lowered his target price from US$2,000 to US$1,500, representing at the time of his report’s publication a projected one-year return of 104.1 per cent.

About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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