Avoid Shopify After Company Shoots Up Post-IPO

Canadian tech company Shopify (SHOP) was the hot IPO of last week. Despite a prospectus IPO price of $17, the stock soared out of the gate closing at $25.68 on Thursday, and further increasing to $28.31 on Friday. That’s a 66% increase in the first two days of trading. Such a strong opening has the company valued at ~$1.9B. Skeptics are claiming that the company is sporting a steep valuation given it is losing money. There is, however a reason, for the hype.

Shopify has seen very strong top line revenue growth in the last 3 years, hovering around 110%. Based on Q1 2015 revenue of $37.34M, Shopify is expected to continue its trend of doubling revenue year over year.

Even with strong revenue growth, earnings have remained negative and operating margins have been steadily declining. A strong contributing factor of this has been the increasing SG&A costs. The increased spending in sales & marketing alongside research & development emphasizes the company’s commitment to continue expanding and growing their top line revenue, however they will need to make improvements to efficiencies if they wish to reverse the trend in their operating margins.

 

SHOP IS

 

Shopify is a SaaS solution that helps establish online businesses and provide retail point-of-sale systems for both online and offline companies. It operates in a growing e-commerce/software market and faces a lot of competition.

 

SHOP Peers Table

 

Looking at the comparables, the e-commerce companies above (ETSY, WIX, GDDY, ZU, CMPR) have placed greater significance on growth rather than profitability. Shopify’s EV/Gross Profit ratio recognizes this trend. While the ratio does imply healthy gross margins for the company it is still quite high relative to the competition. Overall Shopify is currently trading at a premium with 15.5x sales, which is the highest amongst this list. While it’s important to note that the majority of Shopify’s direct competitors are still privately held companies, amongst current e-commerce and software companies Shopify is expensive.

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Terrence Howard 4 years ago Member's comment

Thanks for your article which makes some good points, but I don't agree. I see a lot of potential for $SHOP, which has a lot of publicly traded clients. They are not just another $WIX or $GDDY.