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Apr 30, 2020

Shopify Too Risky For Conservative Investors Safer To Hold It As Part Of A Basket Of Stocks In An Etf

by Richard Morrison

Richard MorrisonThe Covid-19 pandemic has been a nightmare for investors, who watched in disgust as five years of stock market gains disappeared in a month. Many called their brokers for reassurance or to place sell orders, crystallizing their losses. Not that they weren’t warned. In January several pundits pointed out that markets were overvalued and on 5 February 2020, Larry Elliott, economics editor at Britain’s Guardian newspaper, was prescient when he warned readers the coronavirus may turn out to be a “black swan” event that precipitates a selloff.

Despite all the misery, the share prices of some Canadian companies have been holding up reasonably well. The largest of the best performers so far this year has been Ottawa-based e-commerce giant Shopify Inc., a high-flyer that looked vulnerable in January after its shares had tripled in 2019 to $600 from $200. Yet the stock actually gained about 15% in the first three months of 2020 and skyrocketed to more than $850 in the first three weeks of April.

With a market capitalization (shares times share price) of about $97-billion, Shopify is now Canada’s third largest company, behind only the Royal Bank and Toronto-Dominion Bank, and larger than Enbridge Inc., Canadian National Railway Co. and Brookfield Asset Management. Unlike these companies however, Shopify has yet to turn a profit.

Shopify started in 2004 as Snowdevil, an online store that sold snowboarding equipment. The three partners, Tobias Lütke, Daniel Weinand and Scott Lake, were unhappy with the e-commerce platforms then available. Mr. Lütke, a computer programmer, developed his own platform and launched it as Shopify in June 2006.

The company started new platforms and applications, acquired smaller studios and went public on the Toronto and New York stock exchanges in 2015. Today, Shopify’s platform serves more than a million businesses in 175 countries, including corporations such as PepsiCo and Staples.

Shopify’s merchant clients subscribe to its web- and mobile-based Software as a Service (SaaS). The Shopify dashboard allows subscribers to display products, process orders and payments, fulfill and ship orders, manage inventory and analyze customers’ buying patterns.

Although Shopify can accommodate large retailers that pay higher fees, most of the company’s clients are small businesses whose subscriptions cost less than $50 per month. Along with subscriptions, Shopify gets its revenue from variable platform fees and from the sale of themes, apps, and the registration of domain names.

Shopify uses cloud computing, which allows users to access data storage and computing power through data centres over the internet. Users have all the advantages of having their own data centres without having to hire a stable of computer geeks to ensure everything is up-to-date and working.

Although it has yet to show any profit, Shopify’s sales are booming. Shopify’s revenue is split between subscriptions, which account for about 43% of sales, and what it calls merchant solutions, representing 57% of sales via fees for payment processing, transactions, referral fees from partners, Shopify Capital, Shopify Shipping, and sales of point-of-sale hardware.

In 2019, Shopify had total revenue of U.S.$1.578 billion, up 47% from 2018. The operating loss for 2019 was U.S.$141.1 million vs. a loss of U.S.$91.9 million for 2018. In both cases, the operating loss represented about nine per cent of revenue.

Shopify’s net loss for 2019 was U.S.$124.8 million or U.S.$1.10 per share, up from a loss of U.S.$64.6 million (U.S.61c). The increased loss was largely due to a one-time capital gain that had been triggered in the third quarter after Shopify transferred regional and territory rights, the company said.

In 2019, the number of consumers buying from Shopify merchants grew to nearly 300 million, up 37% from 2018, the company said. Shopify also expanded the number of languages its clients could use to 20 from seven and expanded its Shopify Payments service to 15 countries from 11, as well as launching the ability to sell in multiple currencies. By the end of the year 29% of its merchants were based outside its core geographies, the company said.

The company’s forecasts for revenue, operating losses and capital expenses for this year were based on estimates made before Covid-19 hit, so it would be unfair to mention them here.

Shopify’s balance sheet is strong, as it listed total assets of U.S.$3.349 billion against liabilities of U.S.$157.4 million at the end of 2019.

Since Shopify has no earnings yet, a price/earnings ratio cannot be calculated. Instead, at its recent price, Shopify is trading at about 31 times sales, says, while puts Shopify’s price at 33 times sales per share, in either case a lofty valuation.

Morningstar’s latest analyst note, written after Shopify released 2019 results in February, awarded the stock only one star out of a possible five. Morningstar analyst Dan Romanoff said the shares would be fairly valued at U.S.$218, or $290 Canadian. “Once again we find there is a lot to like at Shopify in terms of growth and once again we find the valuation daunting. With the shares trading near $550 intraday, bulls on the stock are clearly embedding more growth than we are comfortable with,” he wrote.

Shopify’s high price/sales ratio and the fact it has yet to make a profit makes it too risky for conservative investors to own directly. Instead, the company’s shares can be held via several specialized exchange-traded funds that have Shopify among their largest holdings.

CI First Asset Morningstar Canada Momentum Index ETF (WXM)

This fund has Shopify as one of its equally weighted 30 Canadian holdings. The fund, launched in 2012, has about $636 million in Assets Under Management (AUM) and carries a Management Expense Ratio (MER) of 0.6%.

“Empirical evidence suggests that outperforming stocks tend to continue to perform well, while underperformers tend to continue to lag,” First Asset’s fund overview says. The fund screens for above average returns on equity, with an emphasis on upward earnings estimate revisions and technical price momentum indicators and is rebalanced quarterly, the overview says. The fund’s unit price slipped about 23% in the first three months of 2020 but last year it handily outperformed the S&P/TSX Composite index, with a total return (share movement plus dividends) of 31.4% in 2019 vs. the TSX’s 22.9%.

Along with Shopify, WXM’s portfolio includes Real Matters Inc. (itself up 15% as of the end of March), First Service Corp., Canadian Apartment Properties REIT, Wheaton Precious Metals Corp., Constellation Software and Northland Power Inc.

Global X Cloud Computing ETF (CLOU)

Shopify is also a major holding in this relatively new ETF, launched by New York based Global X in April 2019. The fund has U.S.$404 million in AUM and carries a MER of 0.68%. The cloud computing fund is part of Global X’s stable of ten disruptive technology ETFs, which hold stakes in companies within sectors such as robotics and artificial intelligence, social media, video games and e-sports, fintech, lithium and battery technology, autonomous and electric vehicles, cybersecurity and future analytics.

Along with Shopify, the cloud computing fund’s other major holdings include Netflix Inc., the giant streaming entertainment service, and, the customer relationship platform that helps companies with sales, service and marketing. The fund’s unit price slipped about 6.6% in the first three months of 2020.

Global X E-Commerce ETF (EBIZ)

Shopify is also a major holding in this tiny fund, which has just U.S.$6.0 million in AUM. The fund, launched in November 2018, carries a MER of 0.5% and climbed 32.88% last year. Along with Shopify, other e-commerce companies in the fund’s top ten holdings include, Vipshop Holdings Ltd. a Chinese discount retailer; and Beijing based online retailer Inc. The fund’s units fell 16.0% in the first quarter of 2020.

First Trust International Equity Opportunities ETF (FPXI)

This fund, launched in 2014, has U.S.$54 million in AUM and carries a MER of 0.7%.

Shopify is the fourth largest holding in this ETF, at 3.36% of its U.S.$53.79 billion in AUM as of the end of March 2020. FPXI focuses on companies outside the United States, with about 41% of its assets based in China, nine per cent each in Germany and The Netherlands, eight per cent in Japan, and smaller stakes in companies based in Sweden, Denmark, France and Canada (entirely from Shopify). The fund managed a gain of about 32% in 2019 but its units slipped 7.8% in the first quarter of 2020.


Shopify has held up better than any Canadian large-cap company in the 2020 bear market. In my opinion, a share price of more than $850 shows shareholders expect Shopify to be the next, and anything less will be disappointing. Conservative investors interested in the e-commerce and cloud computing sectors are better off with a diversified portfolio of stocks held within an exchange-traded fund.

Similar bear markets occurred during the banking crisis of 2008-2009 and after the bust of 2000-2002. In both cases, a sharp selloff was followed by a gradual recovery. This is probably the case in 2020.


Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.