Here’s why Shopify is now in buy territory

The stock is down by over 75 per cent and has now erased all of its pandemic gains, but don’t count out Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), says Scotia fund manager Greg Newman, who thinks there are plenty of reasons to be bullish on the stock and company, starting with Shopify’s founder and CEO Tobi Lutke.

Shopify and Lutke have come under increasing scrutiny of late on a number of fronts. First and likely foremost is the company’s share price which had floated up to as high as $2,146 in mid-November of last year before tumbling with the general market rotation away from high-growth stocks in the tech sector.

This year, aided by poorly-received quarterly reports SHOP kept falling, touching $414 per share earlier this month. That’s a huge pullback for a fan favourite stock and company which over the years has consistently outperformed forecasts and shown plenty of fight, rallying multiple times after the release of short-seller reports, for instance, and driving shareholder value while carving out a seemingly rock-solid position in the e-commerce space.

But the company’s current troubles appear to have a different colour to them, starting with the relatively poorer growth numbers in recent quarters. Shopify recorded a rare Q4 earlier this year when its revenue and earnings arrived merely in-line with analysts’ estimates, a contrast to the consistent beats delivered over the years. Difficult comps were a factor, as the company’s top and bottom line growth slowed on a year-over-year basis when lined up against the gaudier and pandemic-friendly results of 2020 and earlier in 2021, with management admitting that the return of shoppers to bricks and mortar would likely decelerate the company’s growth over 2022.

But SHOP followed up the Q4 results with more worry in its first quarter 2022 report delivered in early May where revenue was up a less splashy 22 per cent year-over-year and actually missed the Street’s quarterly forecast, as did earnings.

Questions about company performance are one thing but Shopify has also recently been under fire about its governance practices, where management has proposed granting Lutke a “founder share” which would effectively give him 40 per cent of total voting power for as long as he stays with the company.

Supporters of the proposal frame it as a way for Lutke to continue steering the ship but critics see an unfair power grab. 

Last week, the Globe and Mail reported that proxy advisory firm Institutional Shareholder Services (ISS) put out a report claiming that a multi-class share structure isn’t appropriate in today’s market nor does it seem beneficial in Shopify’s case.

“Canadian market best practices generally call for a following of a one-share, one-vote principle, with a view to alignment between economic interest and voting power at a given company,” the ISS report read.

Still, investors surely must be looking at Shopify’s current share price and thinking now could be an opportune moment to buy into a name that’s perhaps been knocked down a little too hard. And Newman, senior wealth advisor for Scotia Wealth Management, would tend to agree.

“There’s good news and there’s bad news [on Shopify],” said Newman, speaking on BNN Bloomberg on Friday. “This stock is still trading, if you’re looking at a P/E 2024 of about 100x, which is still super expensive. But on a price-to-sales, they’re only about 6x now [where] at the high they were 35x or 40x.”

“We are modelling 56 per cent earnings per share growth on this name over a forecast horizon,” he said. “Last quarter, their general merchandising volumes were down 20 per cent [but] the valuation on this name is always incredibly fickle. You have governance change concerns right now, and if they can get that through they’re also looking at a ten-for-one stock split which I think will help this company. I do like it”

Earlier this month, in a rare break from tradition Lutke commented on Twitter about Shopify’s tumbling share price, griping about sell-side analysts and their stock recommendations and saying analysts need to be “held accountable” for their calls on stocks and wondering whether there needs to be a public record-keeping of analysts’ calls, something that is already being tracked by a number of financial websites.

But Newman feels that Lutke’s performance to date should speak for itself and the SHOP founder should have a long leash to lead his company going forward.

“Even though I understand the governance folks that are trying to make the voting more equal, I think that you want to bet on the founder of this company who has done one of the best jobs on the planet at running a company,” Newman said.

“I think there’s considerable growth, I think it’s great story,” he said. “I recommended this name very early on. When it got to $1,000, $1,500 and $2,000 it was just luck that it went that high that quick, frankly, and we were trimming it back a lot in around $1,700-$1,800.”

“We’re buyers again. I think he can pick away this,” Newman said.