Shopify Inc (US) (NASDAQ:SHOP) has become a battleground stock in the last month, with analysts furiously arguing about whether you should buy or sell it. What they don’t argue about is more basic. Shopify stock is not profitable.
Since short seller Citron Research issued a report on Shopify stock October 4, calling it a “get rich quick” scheme, the shares are down 14%. But more importantly, Shopify earnings for the third quarter have been reported.
That report shows a net loss of $9.38 million, slightly more than the $9.12 million lost in the same quarter a year ago. This loss came despite a 70% rise in revenues, from $99.58 million to $171.46 million.
The charge that Shopify lets people in the developing world run affiliate marketing schemes on one another won’t dissuade me from buying the stock, but continuing losses will. As will my concern that Shopify’s runway isn’t long enough to achieve profitability.
Why the Loss for Shopify Stock?
SHOP stock bulls compare the company to Square Inc (NASDAQ:SQ), which also has a small-business niche with transaction-processing services. They point out that while Square has yet to turn a profit, the stock is on fire.
Those critics have a point, and I have been concerned that transaction processors in general may be overvalued. But Square should have one thing Shopify doesn’t have, when it reports on November 8: a profit. Square is also piling banking and accounting services into its bundle, and aiming at larger businesses. It’s not depending on just finding more customers with kiosks, either online or offline.
Citron has a good reputation for finding shorts. It was right on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Express Scripts Holding Company (NASDAQ:ESRX). Step away from the hyperbolic language of its reports, and the fact is, we should take it seriously.
So far, we’re in the he said/he said stage with Citron and Shopify. Shopify has defended itself, and Citron has responded. The market is, for the moment, holding its breath.
How Long Is the Runway for SHOP Stock?
My question for Shopify stock is, how long is its runway? How much of its chosen market does it presently have, and what else can it sell to those customers?
This is where I have a problem. Over the last two decades, I have seen a lot of internet niches grow fast and then fade out, such as blogging. I have also seen niche companies fail to gain sufficient scale to achieve leadership, and be crushed by larger ones, as is happening with Snap Inc (NASDAQ:SNAP) right now. Niches can be filled quickly, and consolidation can occur rapidly.
Shopify offers commerce websites. But it doesn’t offer the infrastructure that would be needed to make such websites grow. It also doesn’t have the scale of Amazon.com, Inc. (NASDAQ:AMZN), which has millions of third-party sellers on its platform.
If this were 2005, I’d be bullish on Shopify. But this is 2017. To say you’re going international isn’t good enough for me. To me, Shopify’s runway doesn’t look long enough for it to achieve profitable liftoff.
Why Not Just Avoid Shopify Stock?
Our Will Ashworth and Luke Lango both consider SHOP stock a bargain at current prices. Revenue for the first three quarters has already exceeded that for all of 2016, they note. There is nearly $1 billion in cash on the books and hardly any debt. Total cash flow is positive, and gross margins are also impressive.
But there is something else you can do with a stock that’s operating under a cloud besides buy it or sell it short.
You can just leave it alone.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
