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Shopify shares finish up nearly eight per cent as firm tops Q4 forecasts

 Shopify headquarters on Elgin Street in Ottawa.
Shopify headquarters on Elgin Street in Ottawa.

Shopify’s share price was on steroids in early trading Wednesday following the release of better-than-expected fourth-quarter results. Shares were up roughly 20 per cent, reaching $593.89 on the New York Stock Exchange and C$786.07 on the TSX, before retreating to a still-healthy gain of nearly eight per cent on the day.

It was the 18th consecutive quarter in which Shopify has beat consensus estimates for revenues. But Amy Shapero, the company’s chief financial officer, acknowledged the fourth quarter was something special.  “It was a spectacular quarter,” she noted during a conference call Wednesday with financial analysts, “Every part of the company was contributing. That’s not something we expect to happen every quarter.”

Revenues came in at $505.2 million (all figures U.S.) for the quarter ended Dec. 31, up 47 per cent year over year, the company reported. The consensus forecast by independent analysts according to Reuters had called for a tally of $482 million. Shopify had led them to expect it would be in the range of $472 million to $482 million.

However, reflecting Shapero’s comment about the fourth quarter being unusually good, the company also revealed a relatively conservative revenue forecast for 2020. Shopify expects these to be in the range of $2.13 billion to $2.16 billion.  This is virtually the same as the pre-earnings consensus forecast by independent analysts of $2.1 billion. And it compares with total revenue of $1.578 billion for 2019.

“2019 was a milestone year for us , ” said CEO and co-founder Tobi Lütke,

“We’ve earned the trust of more than one million merchants,” he added in reference to the number of online shops now run using Shopify technology.

Shopify makes its money by charging online merchants a monthly fee for its dashboard technology. It also earns revenue by helping merchants with various aspects of running an online business, including payments, shipping and financing and analytics.

Typical of companies chasing rapid growth, Shopify continues to post significant losses.  The operating loss in the fourth quarter was $30.1 million. While that was better than the expected operating loss of $47 million to $57 million, it nevertheless represented a deterioration from the $9.5 million loss in the fourth quarter of 2018.

Not only that, Shopify on Wednesday signalled much bigger losses in the coming year as it continues with aggressive hiring — the company now employs more than 5,000 including about 1,000 at its Ottawa headquarters — and investments such as a new fulfillment network that will see it compete more directly against Amazon.

Shopify anticipates its operating loss for 2020 will be in the range of $324 million to $344 million, much of it the result of stock-based compensation costs.  Shopify is fairly generous with its shares when it comes to paying employees.

Shopify said Wednesday it will invest another $80 million in new offices, notably in Vancouver and Toronto, as well as in new applications, products and markets, especially overseas.

Last fall, the company announced it would invest $1 billion over five or so years in a new fulfilment network — staging areas that will allow Shopify to store and ship products on behalf of smaller businesses that want to offer their customers two-day delivery. It has been cautious on this front.

Shopify said it would continue to move “carefully” to roll out the network and would add “scale only at the rate at which service levels can be maintained.”

Shopify finished the year with $2.46 billion in its coffers, up from roughly $2 billion at year-end 2018.

The company on Wednesday offered investors a snapshot of a smoothly-run operation which appears to be handling the inevitable problems of rapid growth very well.  The big question handing over investors is whether Shopify’s share value has escaped its moorings.

At Wednesday’s peak, the company’s market value was nearly $69 billion on the NYSE and C$90 billion on the TSX.  That’s roughly 33 times the firm’s projected sales for this year. Subtracting Shopify’s cash mountain gives an enterprise value of $66.4 billion — 31.6 times revenues.

PI Financial analyst Gus Papageorgiou tackled the issue of Shopify’s valuation on Feb. 10, when the firm’s share price was just $476.85, implying an enterprise value of $51.3 billion — some 26 times his estimate for 2020 revenues. (Shopify closed Wednesday at $531 per share.)

“These are very rich multiples which are vulnerable to collapse if even the slightest expectation is missed,” he wrote, while advising clients to wait for a drop in the shares before acquiring some.  “We continue to believe Shopify has an unassailable competitive position in a market that is almost immeasurable,” he added.  “However, at some point valuation matters.”

Not on Wednesday though.


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