Shopify Inc (SHOP) stock is riding a nice little rally right now. Through Tuesday, shares of the cloud-based e-commerce platform had shot up 30% in the last month. The sudden surge, buoyed by renewed confidence after reporting outstanding fourth-quarter earnings, apparently isn’t enough to deter Alphabet Inc’s (GOOG, GOOGL) Google from mulling a takeover.
Last week, Re/code reported that Shopify, as well as a few other app and cloud-based companies, all private, were in consideration as potential takeover targets, all part of Google Inc. CEO Sundar Pichai’s efforts to court enterprise cloud clients.
Ultimately, Google wants to seriously compete with the likes of Amazon (AMZN) and Microsoft (MSFT), whose own cloud businesses, Amazon Web Services and Azure, respectively, blow away the competition.
Naturally, shares of Shopify stock jumped on the chatter, spiking 5% after the Re/code article, which quoted “sources familiar with the discussions.” But if you’re a SHOP stock holder hoping for a buyout into the GOOG umbrella, you might as well sell.
It ain’t gonna happen.
Shopify Knows Its Worth
In an article published about 14 hours after the Re/code article, a Business News Network piece also quoted “sources familiar with the company” to provide a different part of the developing tale. This time, “the company” wasn’t Google.
SHOP stock, it appeared, would only be acquired at a “ridiculously high premium,” the source familiar with Shopify said.
The BNN piece went on:
“Shopify’s dual class share structure puts decision making power in the hands of company insiders and early investors. Sources tell BNN the company is not actively seeking buyers and remains focused on organic growth.”
To me, this is more or less a “case closed.” To interest insiders and early investors, stakeholders will only entertain, it sounds like, something much higher than the current Shopify stock price. And at a market capitalization of $2.2 billion, Shopify would be Google’s fourth-biggest acquisition ever.
Consider the fact that the premium to Shopify’s current stock price would be hefty, lessening the likelihood of an acquisition. A 40% premium would put it around $3.1 billion, tied with DoubleClick for Google’s third-largest buy.
With CFO Ruth Porat brought in last year to rein in excessive spending, paying a 40% premium for a company that has never been profitable is a longshot. Analysts don’t see Shopify being in the black in 2016, or even in 2017.
Given GOOG’s disastrous experience with the Motorola acquisition (purchased in 2011 for $12.5 billion, sold in 2014 for $2.91 billion), Google may understandably think twice before shelling out vast sums for unprofitable companies.
Shopify, of course, is much different from Motorola, and the pace of its revenue growth is impressive. Revenue jumped 99% year-over-year in the fourth quarter, and gross merchandise volume roared 109% higher to $2.8 billion.
All the more reason why company insiders and early investors probably don’t want to part with SHOP stock for anything less than a “ridiculously high premium.” If I had a big role at Shopify, believed in the vision, had a history with the company and an equity interest, there’s no way I’d want to sell out to Google.
Shares are up 30% in the last month, after all, so I’d scoff at an offer even if it was an insanely generous 40% premium. And the Wall Street reaction for GOOG wouldn’t be too kind if it issued a presser tomorrow stating it paid double Shopify’s stock price to beef up its cloud portfolio.
Cloud is important, and Shopify’s an impressive player in that area, but if Google does make an acquisition in the area, it’s much more likely to be one of the smaller, private companies listed in the Re/code report: Metavine, CallidusCloud, Xactly or Namely are all more likely candidates.
Please don’t try to hop in SHOP stock with the hopes Google will buy it out. It’s not going to.
While Shopify is an interesting growth stock, I doubt it will have much resilience if the market takes a nasty turn lower again, so tread carefully.
As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
