March 4, 2019

On Monday, the markets started out higher but ended lower with the S&P 500 down 0.4% and Toronto down 0.2%.

Dollarama was up 3.0%. Amazon was up 1.5%. Toll Brothers was up 1.2%.

I have to say Amazon is truly amazing. Last night at about 11:30 my son ordered a piece of equipment from Amazon. It arrived about 16 hours later (today at 3:30 pm) on our step. Due to Prime membership, there was no shipping charge. It must be largely due to technology that they can deliver that fast. As soon as you place an order automated systems kick in and the product is moving towards you virtually instantly.

Shopify was down 2.6% but remains very near its record high at $248 in Toronto and U.S. $186 in New York. I had added Shopify to the list on January 16 and provided my analysis but I had not put a rating on it. Shopify has tremendous growth but is not yet profitable on a GAAP basis. Let’s take a look at some numbers from its balance sheet which is in U.S. dollars. All figures below are in U.S. dollars.

Assets are $2.25 billion. Book equity is $2.09 billion. The market value is $20.63 billion. On that basis investors are paying $9.86 for every dollar of book value. That could certainly be considered expensive but probably not outrageously so for a tech company. But note that it has $1.97 million in cash and marketable securities. That part of the assets can’t be worth more than about that same $1.97 billion. So let’s subtract that $1.97 from the market value and the book equity. Now we have a book equity of $0.12 billion (equity in assets other than cash and marketable securities) and that is valued at $18.66 billion after we deduct the value of the cash and marketable securities. To be fair, I will also add back the $0.20 billion in accumulated losses since those losses were meant to be an investment. On that basis we have a total book equity value in asses other than the cash and securities (with the losses added back) of $0.32 billion which the market values at $18.66 billion. So, the market is valuing every dollar of equity invested in other than cash and marketable securities at $58 dollars. In effect, Shopify has turned every $1.00 invested in assets other than cash and marketable securities into $58 dollars. That is impressive. In the old days alchemists dreamed of turning lead into gold. This looks like today’s equivalent. The alchemy of successful tech investments. It ‘s one thing to turn a few dollars each into $58. It is quite another thing to turn each of $0.32 billion ($320 million dollars into $58 each!.

My point being, that while Shopify is very impressive it also looks extremely expensive on this basis.

Looked at another way, Shopify had revenues of $344 million in Q4. Annualized that would be $1.38 billion per year. Again, it is valued at $20.63 billion. That’s almost 15 times revenue. But of course revenues are growing rapidly. Still, it would seem to be a rich valuation.

I am not prepared to put a rating on Shopify but I will say it is speculative. It is “pricing in” a huge amount of future growth and profitability. And maybe it will achieve that.

I would be cautious investing too much in it. For one thing all it may take is a short-seller to come along and claim it is vastly over-valued and the price could easily fall.

But then again it has momentum and the support of investors.

This is the type of stock that Warren Buffett might put into the “too hard” basket. It is just very difficult to come up with a fair value for a company like this.

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