When a company does a large secondary offering of shares, it should be concerning. Management is probably thinking that the valuation is a bit toppy. Interestingly enough, we may be seeing this with Shopify (NYSE:SHOP). Note that the company has actually pulled off two secondary offerings this year. The first one came in February, when it sold 4.8 units of SHOP stock for $657.6 million. Then a few days ago, the company offered 2.6 million units for a total of $400.4 million.
According to the press release: “Shopify expects to use the net proceeds from the Offering to strengthen its balance sheet, providing flexibility to fund its growth strategies.”
Yes, this is the typical wording for such a transaction. But for those considering Shopify stock, there should be some concern.
Shopify Stock and Growth
Shopify stock has been a prototypical growth play. Over the years, the company has been riding the wave of ecommerce for the SMB (small and midsize business) segment.
For the most part, Shopify has leveraged the cloud and subscriptions to make it easy for these businesses to create a web presence, including add-ons like payments, shipping services, integration with platforms like Amazon.com (NASDAQ:AMZN) and so on.
The company has also been innovative. During the latest quarter, Shopify has announced such initiatives as:
- Locations: This provides multi-location inventory tracking.
- Shopify AR: The service allows merchants to use Augmented Reality (AR) to market products.
- App Store: Shopify introduced a new version, which streamlines the process for searching third-party apps.
Great, right? Certainly. But there is still a problem: Shopify has been experiencing a deceleration in the growth ramp. In the third quarter, revenues rose by 58% to $270.1 million. Yet it was 72% in the same period a year ago. What’s more, in the current quarter, Shopify is projecting the top-line to grow at toughly 44%.
True, this is still robust. But then again, the trend is worrisome.
Even worse, there are some other major companies that are coming into the market. Note that Adobe (NASDAQ:ADBE) is making a play, with its acquisitions of Magento and Marketo.
Then there is Square (NYSE:SQ), which recently purchased Weebly. Of course, Square already has a large customer base and a wide assortment of apps, such as for inventory, scheduling, analytics, payroll and location management.
With all this competitive heat, it will get tougher for Shopify to snag new customers. Over time, there may even be more pressure on pricing.
Bottom Line on Shopify Stock
But competition is not main issue. For me, the valuation is a real sticking point. Even with the recent fall-off in the shares, Shopify stock is still trading a nose-bleed 15 times revenues. This is pretty steep for a company that is experiencing a notable drop off on the top line.
Also, with the economy showing signs of weakness, this could put further pressure on Shopify’s business. Keep in mind that small businesses tend to have a tougher time dealing with economic slowdowns – and this could ultimately mean rising churn.
And finally, the current market sentiment on Wall Street has changed in a big way. When it comes to growth stocks, investors are much more circumspect. So even a small miss could have an out-sized impact on the stock price.
In other words, for now, it’s probably not the time to shop for Shopify stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.