Investors in Canadian e-commerce company Shopify (NYSE:SHOP) have seen spectacular returns. Since its IPO in May 2015, the value of Shopify stock has jumped nearly 1,800%. In the past 12 months alone, SHOP is up 165%.
The question is, how long can this kind of growth continue? Shopify has many fans in the investment community — obviously — but Shopify is showing some worrying signs. The company may be a little riskier than its performance suggests, and with the shares trading around $500, buying them at the wrong time could prove to be an expensive mistake.
Full-Year 2019 Earnings Report
Shopify stock popped on Feb. 12 after the company’s fourth-quarter results beat analysts’ average expectations. The company also provided full-year 2020 revenue guidance of $2.130 billion to $2.160 billion. At the high end, that would represent annual revenue growth of nearly 37%. That sounds great, but it’s lower than the company’s previous rates of revenue expansion.
In 2015, Shopify reported annual revenue growth of 95%. In 2016, its top line jumped 90%. In 2017, its annual revenue growth came in at 73%. In 2018, Shopify’s revenue increased 59%, and in 2019 its growth had dropped to 47%. With the company expecting annual revenue growth of 37% at the most in 2020, the pattern is very clear. Startups’ revenue growth is expected to slow as they mature. However, Shopify’s operating losses have also been steadily rising.
In 2015, Shopify’s annual operating loss was $17.8 million. In 2016, it increased to $37.2 million. In 2017, its operating loss was $49.2 million. In 2018, it hit $91.9 million. Last year, its operating loss rose to $141.1 million. For 2020, Shopify is projecting an operating loss in the range of $324 million to $344 million.
Those two numbers reflect a worrisome pattern: the more Shopify grows, the more money it loses. As the company gets bigger and its growth slows, it gets more expensive for it to sign up more customers and to wring more revenue out of those it already has. In other words, unless Shopify makes some sort of major change, it’s difficult to see when it will stop bleeding red ink. And that issue will eventually catch up to Shopify stock, especially given its sky-high valuation.
In December, Scott Galloway, a marketing professor at New York University’s Stern School of Business posted an interesting proposition. Galloway wrote about the difficulties being experienced by FedEx (NYSE:FDX) and its poor performance as Amazon (NASDAQ:AMZN) increasingly eats its lunch in the e-commerce delivery business.
His proposal to save FedEx? A merger with Shopify. He wrote:
“The pride of Canada boasts a $45 billion market cap vs. FedEx’s $38 billion (think about that). The combined firm would be a viable option to Amazon (the anti-Amazon) — increasingly attractive positioning to a growing cohort of merchants. Retail is an enormous and fragmented business that wants out of the Amazon gulag. Shopify-Ex would offer retailers something they don’t get from Amazon: partnership.”
That would be a massive move for Shopify, going far beyond the $1 billion it spent last year on U.S. fulfillment centers. That kind of move could jump-start its growth rate and give Amazon a serious competitor for its lucrative Marketplace vendors.
The Bottom Line on Shopify Stock
There are many investment analysts who still feel strongly that Shopify’s run will continue through 2020. Among those polled by CNN Business, the average rating is “hold,” as 15 have buy or equivalent ratings, 14 have “hold” or equivalent ratings, and three have “sell” or equivalent ratings. Their median 12-month price target of $587.50 is nearly 20% above the stock’s current price, while one bullish analyst is calling for SHOP to hit $675.
Shopify’s revenue growth rate has been slowing year after year and its losses are rising in lock step. Fantasy scenarios about merging with FedEx aside, Shopify’s shares seem to be running full speed toward a big correction. Figuring out when that will happen is the tough part. Many investment analysts clearly think it’s not going to happen this year.
InvestorPlace contributor David Moadel sums up the current views of Shopify skeptics perfectly:
“Can SHOP’s breathtaking price run continue for another year or two or ten? Maybe. Or in this complacent market, I should say, ‘Yeah, probably.’ But at the current valuation, I won’t be participating in dot-com bubble of 2020, thank you very much.”
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.