Shopify Inc Investors Should Shop Elsewhere

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SHOP stock - Shopify Inc Investors Should Shop Elsewhere

Source: Shopify via Flickr

Wait, did I say Tripadvisor Inc (NASDAQ:TRIP) was ridiculously expensive? I didn’t get a chance to write about the lunatics who have bid up Shopify Inc (NYSE:SHOP) to a $13.8 billion valuation on nothing but year after year after year of showing losses.

Just … stop … now. Please. Do SHOP stock investors not see what’s going on? Yeah, yeah, revenue was up 71% year-over-year to $223 million, coming on the backs of subscription revenue increases of 67% to $94 million, and 74% growth in merchant solutions to $129 million. But that was a slowdown in growth.

Now look, gross merchandise volume for the fourth quarter was indeed amazing — $9.1 billion, up 65%. Gross payment volume was up to $3.5 billion. Gross profit was up 78% to $121 million.

And net income? It was a loss of $3 million. A LOSS, people! For the entire year, the net loss was $40 million. A loss, SHOP stock investors! You are valuing your money-losing company at $13.8 billion on a $40 million annual loss.

Is this thing on?

If SHOP stock cannot manage a profit on over $9 billion worth of gross merchandise volume, I — I just don’t know what to say.

But see, it gets worse. The guidance for the next year is as follows:

Revenues in the range of $970 million to $990 million. Generally accepted accounting principles operating loss in the range of $95 million to $105 million. Adjusted operating income up to $5 million, which excludes stock-based compensation expenses and related payroll taxes of $100 million.

SHOP Based on Questionable Model

A billion dollars in revenue and only break-even? I’m sorry, I don’t get it. Actually, I do. SHOP stock has a business model that is essentially selling business opportunities through affiliate marketers, and depends on affiliate marketing for growth. Sound familiar? Yes, I agree with Andrew Left at Citron Research.

What does Shopify do? It sells websites all set up and ready to go so people can operate their online business. There’s a subscription solution, mentioned above. As businesses succeed, they theoretically upgrade to more expensive subscription solutions. The merchant solutions business provides payment processing, a bit of merchant cash advance, referral fees and point of sale fees.

Left points out that Shopify provides these services to small- and medium-sized businesses. The claim in the SHOP stock earnings report is there are 609,000 merchants. Okay, that might account for the $9.1 billion in merchandise volume, which comes to an average of $15,000 per business. That’s an average, mind you.

Bottom Line on SHOP Stock

But we all know that most businesses fail. So there is going to be churn.

But Shopify does not disclose churn and that is a huge red flag. I am always suspicious of any company that doesn’t reveal this information. If it were really low, they would be thrilled to disclose it. “Look how many customers stay with us!” But Shopify doesn’t do that. That should worry Shopify stock investors.

I can’t say whether or not Citron Research is on to something in regards to the Federal Trade Commission. What I do know is SHOP stock and its business model is lunacy to this investor.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/shopify-inc-shop-stock-investors-shop-elsewhere/.

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