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Shopify Valuation is Concerning

Having previously written about Shopify and explaining why it won’t be the next Amazon anytime soon, the shares continue trending higher. Today the stock hit a new high of $1215.00 on the TSX. This increased value extends the market cap in excess of $140 Billion, on revenue just over $1.5B.

There is a place in the market for Shopify and I believe the company will continue to grow. It is obvious current shareholders are not concerned with current financial performance and more interested in the future performance that could help justify the stock price. Shopify doesn’t show any net income for the past 5 years as it continues to grow and expand. Lets examine some theoretical revenue and net income for Shopify over the next 10 years.


Lets assume Shopify can grow revenue at 50% per year for the next 10 years. On top of that we will assume the company generates 5% net income on all revenue. What would this look like?

Year Revenue (M) Net Income (M)
2020 $2,367 $118
2021 $3,551 $178
2022 $5,326 $266
2023 $7,989 $399
2024 $11,983 $599
2025 $17,974 $899
2026 $26,962 $1,348
2027 $40,442 $2,022
2028 $60,664 $3,033
2029 $90,995 $4,550
2030 $136,493 $6,825
Total Net 10 Years: $20,237

Looking at this chart we can see a best case scenario will show $136B in revenue and just shy of $7B in net income by year 10. Current valuation metrics certainly improve by year 10 but this route seems historically impossible for the company. Can you think of any company that has consistently increased revenue 50% year over year for the past 10 years?

During the next 10 years Shopify could potentially rake in $20B in net income, less than 1/4th of the companies current market cap (values are in US dollars). As a shareholder who might be holding long term this means after 10 years the company wouldn’t be able to return your initial investment in the form of dividends, assuming they paid 100% of those earnings to shareholders. Which means the stock price has to be higher than what it is today in order to generate any return on investment. Also keep in mind during the next 10 years it is likely there will be additional shares issued in order to meet high growth prospects. This means each share an investor owns today will own a smaller amount of the company in the future.

A lot can happen in 10 years and taking into consideration some of the most optimistic outcomes, today’s stock price may be fair value to what you might pay 10 years from now. Taking into consideration inflation, shareholder dilution, and lost opportunities on other investments I believe Shopify is a sell at today’s price level.

At the time of writing this article I am currently short Shopify.

 

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