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Proprietary Data Insights Financial Pros’ Top Business App Stock Searches in the Last Month
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Financial Pros Love Shopify…But Why? |
When you want to set up an online store these days, Shopify (SHOP) is where you go. Their easily navigable yet comprehensive platform gives businesses of all sizes the tools to manage orders, inventory, process payments, and more. It’s why they’ve grown between 40%-50% YoY yearly for the last five years. But at +150x earnings and cash, can Shopify ever grow into a reasonable valuation? Shopify’s Business We all know Shopify for its online commerce store platform. But they’re so much more. Shopify isn’t just for online businesses but for merchants looking to connect to customers through all their channels.
Source: Shopify Investor Relations Shopify’s solutions now extend to logistics, back office operations, shipping, and more.
Source: Shopify Investor Relations Revenues come from two sources:
Shopify sees its growth model as pretty straightforward.
Source: Shopify Investor Relations The more customers they get, the better their financials. Same thing when customers spend more. Financials
Source: Stock Analysis Shopify’s growth coincided with a broader shift to online sales, accelerated by the pandemic. Interestingly, gross margins fell as revenues increased, the opposite of what their growth model claims. In fact, all their margins eroded as they grew in size with one exception – free cash flow margin. Taken together, this says there are lots of non-cash accounting items, which is typical for a high-growth tech company. However, the gross margin erosion implies there are other costs creeping into the business, possibly labor inflation or otherwise. Since the company has very little debt, we wondered what they do with cash flow. It turns out they’ve invested a lot into marketable securities, over $5 billion. Management says it’s for liquidity and flexibility. That seems like a bit of overkill, and makes us question their balance sheet management. Valuation
Source: Seeking Alpha As we noted earlier, Shopify trades at lofty valuations. On a non-GAAP basis, Shopify’s P/E ratio is more than twice its closest peer ServiceNow (NOW). And on a price-to-cash flow basis, it’s 3x more expensive than ServiceNow. Only when we dig into Enterprise Value to Sales and other lesser-used metrics does Shopify appear cheaper than ServiceNow. But all three other competitors on this list, Autodesk (ADSK), DocuSign (DOCU), and Workday (WDAY), are cheaper across nearly every metric. Growth
Source: Seeking Alpha Surprisingly, the growth numbers on the cheaper companies aren’t bad. While Shopify runs away with its average 3-5 year revenue growth, DocuSign’s 27.9% 3-year growth rate is higher than most of the industry. However, only Shopify, ServiceNow, and Workday expect sizable growth next year. Profitability
Source: Seeking Alpha The one place Shopify struggles – profitability. It is dead last in almost every measure compared to its peers. Are you willing to sacrifice that for growth? Our Opinion 4/10 While we love Shopify’s products, we’re a bit skeptical about its management. They hold an unnecessary amount of cash that they’re not deploying. It’s almost like they’re making money in spite of themselves. And there’s no clear explanation for why gross margins continue to shrink. If the stock were cheaper we’d consider it for a portfolio. As it is, we’ll pass. |
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