Shopify Inc.’s extraordinary rally this year is sputtering amid a stretched valuation, a recent share-offering and a broader reappraisal of strong growth stocks.
The share price slumped 6 per cent on Tuesday, marking its biggest one-day decline in three months.
The retreat over the longer-term is more painful: From its record high on Aug. 27, the share price has fallen 28 per cent, marking the most severe correction for the stock in 3 1/2 half years and erasing more than $16-billion from the value of the Ottawa-based technology company.
At its peak, Shopify was the seventh-largest company listed on the S&P/TSX Composite Index, based on the total value of its shares, putting it ahead of blue-chip heavyweights such as BCE Inc. and Suncor Energy Inc..
Now, Shopify has slipped to 12th place.
Shopify did not respond to requests for comment. However, the sell-off coincides with a number of factors that could be weighing on the stock.
The biggest factor: gravity.
Shopify is an e-commerce firm that offers companies a software platform for selling online, and its international success and spectacular growth – revenue increased 48 per cent in the second quarter, year-over-year – has captured a lot of attention.
At their high point in August, the shares were up as much as 187 per cent in 2019 as analysts raised their target prices (their estimates for the share price 12 months out) to keep up. The average analyst target price more than doubled to $470, up from about $220 at the start of the year, according to Bloomberg.
Mutual-fund managers have also flocked to the stock. A research note from Goldman Sachs last month included Shopify – which trades on the New York Stock Exchange in addition to the Toronto Stock Exchange – in its list of the 10 information-technology stocks most overweighted by large-cap mutual funds in the first half of the year.
At the same time, short-sellers have been bailing out of their bets against Shopify. These investors, who profit when a share price declines, were particularly active in the second half of April: The short-interest ratio, which compares the number of shares sold short with the stock’s average daily trading volume, rose to nearly 2.6 per cent, according to data from Bloomberg. Since then, the short-interest ratio has retreated below 1 per cent.
With pessimism evaporating and enthusiasm building, the shares may have been priced to perfection – a condition that has also been weighing on stocks such as Netflix Inc. and Amazon.com Inc. Shopify has not reported a full year of profit, but its valuation can be gauged by comparing the share price with annual sales – and the ratio is very high.
The shares traded at more than 34 times revenue in late August, up from 13 times revenue at the start of the year. Even now, after the sell-off, the price-to-sales ratio is 25. Compare that with Facebook Inc., which currently trades at 8.3 times revenue.
To be sure, Shopify’s strong growth helps offset its hefty valuation to some extent. It recently expanded its operations by introducing its own fulfilment network, which is essentially a collection of warehouses that can offer storage and shipping services.
As part of the strategy, it struck a US$450-million deal earlier this month to acquire 6 River Systems Inc., which makes autonomous warehouse robots. The deal is not expected to add meaningfully to Shopify’s revenue in the near-term, but will drive up expenses.
The expansion also comes with risk, given that Shopify is venturing into new and costly territory here. The company issued 2.185 million shares in a secondary offering last week, raising about US$694-million.
While the offering boosts the company’s financial ability to fund its growth opportunities, it raises questions about the cost of this growth. Investors, it seems, are now taking a wait-and-see approach to the stock – a big shift from last month, when the rally looked as though it had no limits.
David Berman