CA - Is It Time To Go Shopping For Shopify Shares?

2024-06-07 09:58:15 ET

Summary

• Shopify shares have experienced significant volatility, with a recent implosion in share price following a disappointing earnings report.
• Despite this, Shopify has consistently adapted to changing ecommerce environments and has become the largest competitor in its space.
• The company's ability to add new merchants at an accelerated pace and its focus on providing a wide variety of software tools for optimization have contributed to its above-average growth.
• The company's margins are showing strong positive trends.
• The company has many growth initiatives from Shop Pay, to B to B, to POS and international expansion that should enable the company to grow faster than the overall ecommerce space.

The quarter reported and the share price implosion: some context and background

It seems like another eon. In preparing to write this article, I looked at my history of Shopify articles that I have published on Seeking Alpha over the last 8 years. When I wrote my first article , Shopify shares were at a split adjusted price of $2.64. Confession here: while I have owned the shares much of the time during the last 8 years, I have not come close to the 20+X return I could have had just buying and holding. I chose to trade it, and while most of the trades were profitable, the right strategy, obviously would have to buy and hold. I didn’t follow my own mantra to my cost. And I do not own the shares at the moment based on portfolio constraints rather than anything else.

Interestingly, while the shares have risen by 2,056% since that first article according to the SA calculation, the increase wasn’t primarily a factor of a valuation expansion. In 2016 when I first wrote about Shopify, its revenues were $390 million, and it made an adjusted operating loss and burned cash. Over the next 12 months, I am projecting that the company will report about $9 billion in revenue with a free cash flow margin in the mid-teens. So revenue has grown by 23X and cash burn has become free cash flow. Of course in 2016 Shopify was projecting a CAGR of over 80%, and now the CAGR, adjusted for the disposition of the logistics business is about 22%-24%.

So much for a walk down memory lane, although one that I believe to be relevant to a current investment thesis. By that, I mean that Shopify has adapted well to a variety of changing ecommerce environments and has managed to provide customers a positive experience. This has enabled the company to become the largest competitor in its space which can be broadly defined as providing an e-commerce infrastructure for brands and merchants. The company’s leadership team has been remarkably stable over the years and its founder, Tobi Lutke is still the CEO, and Harley Finkelstein is still the president. Glen Coates has run a part of the product organization for many years now. Part of the reason for my recommendation is that the company’s management team has successfully surmounted many challenges and has been successful in evolving the offering substantially and consistently....

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