Falling knives, e-commerce hangovers, leadership power grabs… it’s all part of the fun these days around Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), and while the stock may look tempting at current levels investors have to know what they’re getting into, says portfolio manager Jamie Murray.
“Shopify is in that group of Internet software and commerce technologies, and the company’s stock has been crushed year-to-date and going back a year,” says Murray, head of research for the Murray Wealth Group, who spoke on BNN Bloomberg on Tuesday.
“The valuation multiples have gone from all-time highs to almost all-time lows now in terms of the different metrics, without that profitability backstopping the valuation, right now it’s that catching a falling knife type game where, is $450 the bottom? Or $400 or $350?” He said.
Shopify announced on Wednesday the results from a pair of votes at its annual general meeting, one on a proposed ten-for-one stock split and the other on granting founder and CEO Tobias Lütke special voting rights for as long as he remains with the company. The stock split went off without a hitch at 99.64 per cent of voters approving the arrangement, while the vote was decidedly more nuanced on the founder’s share, a proposal which would give Lütke and his family and affiliates 40 per cent of the company’s voting power regardless of future changes in overall share count. That vote passed as well with a total of 72.4 per cent of the votes cast in favour, yet excluding Lütke’s and his associates’ and affiliates’ votes the margin was a narrower 53.7 per cent. The vote needed a two-thirds majority of all shareholders and a simple majority of class A and class B shareholders excluding Lütke and his associates.
The company had said the founder’s vote arrangement was needed for management to have the power to steer the ship in the direction it wanted, with Lütke’s leadership clearly in mind. But critics have called it a power grab that acts against the fairness of one-share, one-vote.
“Personally, I’m never in favour of protective voting powers like this, largely because it really doesn’t instill best practices from a governance perspective,” said CFRA analyst Angelo Zino, speaking on BNN Bloomberg on Wednesday.
“That being said, I’m not necessarily surprised just because of the absolutely fantastic job that [Lütke] has done here over the last two decades,” he said. [But] this is a guy who’s only about 41 years old, so he’s got this founder share out there and, really, it’s going to remain intact for decades to come lately. That could potentially deter new investors out there, potentially an activist who might want to get involved or even potentially M&A in the future.”
Murray says Shopify’s move is in keeping with the general trend among public companies towards consolidating power and giving more compensation to CEOs. In Shopify’s case, it means shareholders are now all-in with Lütke’s approach.
“Ultimately, if you’re invested in Shopify you’re investing in this management team that has brought you to this point to take you to the next level,” Murray said. “From that standpoint, it’s not material in terms of how we would look at the stock but definitely if the company falters or you don’t agree with the strategic direction but you think there’s value in the assets, that’s where it can become an issue.”
Shopify’s share price has been decimated over the past half-year, grinding down to now over a 70 per cent loss in value since last November. The tech sector has been a particularly fond target of investors looking to change their holdings towards a more defensive position, and growth-oriented names like Shopify are clearly in the crosshairs.
Murray said it’s wouldn’t be a total mistake to buy SHOP right now but that investors will want to be sure they’re okay with more potential downside, as that’s undoubtably a possibility.
“If you’re looking to buy it today, it’s just a matter of [whether] you think the upside is long enough and can you sustain holding the stock if this drawdown continues and goes a little bit deeper,” Murray said.
“We still think the digital economy is in the early days relatively speaking,” he said.
Shopify reported first quarter 2022 earnings last month which came lower than expected on revenue and earnings. SHOP’s topline was up 22 per cent US$1.2 billion, which was a lot smaller of a growth rate than last year’s Q1 at 110 per cent and missed analysts’ consensus estimate at US$1.25 billion. Gross merchandise volume was up 16 per cent to US$43.2 billion, which was also a much lower year-over-year growth rate than the Q1 2021 rate of 114 per cent. Earnings were US$0.20 per share compared to the consensus call for EPS of US$0.64 per share.
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