May 7, 2020
Buyers Beware: Shopify is Not the Next Amazon
Shares in Shopify (SHOP-T) reached new all time highs and recently became the most valued stock on the TSX in Canada by market cap. The shares traded 6.94% higher to close at $1034.32, giving the stock a market cap of 121.26 Billion. That was enough to beat out Royal Bank of Canada (RY-T) which closed at a share price of $84.62 with a market cap of 120.50 Billion. If you are thinking of purchasing Shopify shares, buyers beware, Shopify is not the next Amazon.
Let me start by saying Shopify is a well run company supporting growth and expansion which has benefited during this pandemic as companies race to provide online shopping alternatives. During the latest quarter the company seen revenues increase 47% from the previous year. The stock price has also seen tremendous gains from around $650 in February to $1034.32, representing an increase of 59%. Since the stock IPO in 2015, shares have increased more than 4500%!
Lets look at some historical companies which previously held the top market capitalization on the TSX. Some of these names include Nortel, Research in Motion, and Valeant Pharmaceuticals. Nortel filed for bankruptcy in 2009, Research in Motion transitioned into software and no longer sells Black Berry phones, and Valeant Pharmaceuticals completed a major debt reorganization and name change to Bausch Health. For what remains of these once popular stocks only a fraction of their market cap remains. All 3 companies had tremendous growth prospects and eventually hit road blocks resulting in significant shareholder value deterioration. Will this happen to Shopify?
Shopify appears to have a clean balance sheet with debt under control and sufficient cash position to support growth prospects. It would appear financial constraints such as debt are not a going concern at this time. Great, so what is the big deal?
Shopify’s current valuation is not cheap. Last year the company generated only 1.578 Billion in sales and posted a loss of 125 Million. Consider sales increasing 50% for the remainder of the year, Shopify would generate 2.367 Billion. Keep in mind cost of goods, operating expenses, and taxes which need to be paid before any return is realized for shareholders. It is hard to justify a 121.26 Billion valuation for the company when there is no net income left for shareholders at the end of the year. But isn’t Shopify going to be the next Amazon?
Amazon is huge compared to Shopify. Although Amazon trades at a premium it doesn’t compare to that of Shopify. Amazon’s current price today is $2351.26 and has a market cap of approximately 1.17 Trillion. Amazon generates more than 280 Billion in sales today. Today Amazon is big, but what about when its valuation was the same as Shopify?
Let’s roll back to 2013 when Amazon’s market cap was similar to Shopify’s current market cap of 120 Billion. In 2013 Amazon shares traded from $253-405 per share. During fiscal year 2013 Amazon recorded sales of 74.4 Billion and net income of 274 Million. On a market cap comparison basis Amazon completed 31 times more sales than Shopify. Even in 2005 Amazon’s market cap ranged from 13-20 Billion, however Amazon recorded more than triple the sales Shopify is currently bringing in.
The bottom line Shopify shares are significantly over valued at this time and nowhere in the foreseeable future will Shopify become the next Amazon. At the time of writing this article I am short Shopify shares.