I have never been a fan of Shopify (NYSE:SHOP) stock.
I have been forced to eat my words.
I called Shopify a bubble stock in 2017. I told investors to ignore the crowd rushing into it in 2019.
At the time of my 2019 story, Shopify was trading at about $315/share. It opened June 14 at around $315.
All internet stocks have had a tough 2022. The Nasdaq average is down 27%, solidly in bear market territory. Mighty Amazon (NASDAQ:AMZN) is down 37%. But investor losses at the Canadian e-commerce player top them all, the stock down 72%.
Shopify shares cost nearly $1,400/share stock in January. They are now available at pre-pandemic prices. Is this a bargain? Or is it a trap?
| Ticker | Company | Price |
| SHOP | Shopify | $304.08 |
SHOP Stock and the Lutke Problem
Shopify now brings in twice the revenue each quarter it did when I first wrote about it. The problem is that it’s now spending all it takes in, and more. Shopify lost $1.47 billion in the March quarter, $11.70/share. Another loss is expected when it reports the current quarter on Aug. 4.
The confidence CEO Tobias Lutke displayed on the way up is now seen as hubris. Just as cryptocurrency reached its peak, he joined the board at Coinbase (NASDAQ:COIN). Shopify now offers to sell goods for crypto.
After the first-quarter results came out, Lutke demanded a special “founder share,” representing 40% of the stock’s voting power. He got it, but in the process he won the enmity of investor advisory firms. Analysts at Wells Fargo (NYSE:WFC) began worrying about the stock, like farmers looking at a barn door after the horse has bolted.
To sweeten the founder share deal, Lutke also authorized a 10-1 stock split, which takes effect later this month. This will take the stock’s price below 2017 levels
The Amazon Problem
The key to Shopify’s rise has been its status as a bulwark against Amazon. But Amazon is now gunning for Shopify and its merchants, in an omni-commerce world. By offering distribution and payment services to non-Amazon merchants as Buy With Prime, Amazon hopes to serve big merchants before Shopify can grow to serve them.
In response Shopify bought Deliverr, a logistics company, for $2.1 billion, mostly cash. This goes on top of 6 River, for which it paid $450 million.
Deliverr leases warehouses and uses them to pack orders. It uses predictive analysis software to anticipate demand. This will power Shop Promise, a service on Shopify’s Fulfillment Network that hopes to assure next-day delivery of orders. Shopify hopes to interest merchants outside its network in the offering, along with Shop Pay, which has supported buy now, pay later for a year.
Despite these moves the stock has continued to fall. Long-time investors like Mawer Investment pulled out. While most of Shopify’s 28 analysts remain on-side, recommending clients buy the stock, there are now two sellers.
The Bottom Line
I believe Tobias Lutke is no Jeff Bezos.
By getting in deep with the crypto bros, Lutke has taken his eye off the ball, at the very moment company operations needed his full attention. It was fear of a backlash against his move into Coinbase that drove his demand for control.
I’m a long-term investor who likes to bet the jockey rather than the horse. I look for CEOs who have a clear vision and understand their niche. Tobias Lutke doesn’t measure up.
Even if Lutke were a second Bezos, Shopify stock remains expensive. A market cap of nearly $40 billion for a company that won’t do $5 billion in business this year is high in today’s market. The March quarter’s losses have driven the price to earnings ratio over 200.
Shopify needs to turn losses into profits quickly if it wants to get back the analyst love that fueled its rise.
On the date of publication, Dana Blankenhorn held long positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
