Shopify overvalued? January 13, 2020

With some trepidation (given its history), I have updated the report on Shopify and rated it Sell at U.S. $429 (or Canadian $560). This Canadian-headquartered company reports in U.S. dollars and does most of its business in U.S. dollars and therefore it is appropriate to analyse this company in U.S. dollars .

Shopify is an incredible success story. The founders and management are to be highly commended.

But the valuation is very rich. It is trading at 33 times sales per share. Adjusted earnings in the trailing year are 4.8% of sales. If it is assumed that bottom line earnings would be more like 33% of sales if a large part of R&D and marketing were treated as capital expenses rather than current expenses, then it would still be trading at 99 times earnings. The forward P/E based on analyst earnings estimates is 466.

It is probably possible to project out years and years of 40% growth and earnings growing as a percent of sales and the P/E remaining high and therefore justify the stock price. But it seems like that requires heroic growth assumptions.

The price has been rocketing higher and is up another 3.5% to U.S. $444 even as I post this. So, the market may make me look dumb for rating it a sell. But that is what the numbers strongly suggest to me.

I would also note its history of selling shares. Based on that history we might soon see it make another share sale. That has been a good strategy and has given the company an enormous war chest of cash.

With an ever higher share price, insiders have become enormously wealthy by selling off just some of the shares they receive in stock options or that they bought years ago at far lower prices.

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