Shopify Reminds Me Of Tesla In 2013 – Seeking AlphaeCommerce
Shopify (NYSE:SHOP) soared through Q2 as one of the top performers across the broader market, with shares topping the $1,000 threshold just months after bouncing around the $300s. At current prices, Shopify’s market cap sits near $120 billion. To put that in perspective, that’s double that of Square’s (NYSE:SQ) and one-third that of recently partnered Walmart (NYSE:WMT). Yet Shopify is still unprofitable and is probably one of the most (if not the most) overvalued stocks based on fundamentals, but shares are still cruising higher. And shares could continue to cruise higher even as fundamental metrics and financials don’t necessarily back that growth.
Shopify’s Financials Aren’t Great…
Even though Shopify has powered higher on the back of , with solid growth in revenue, total GMV and new stores, annual incomes are still down in a rut. Operating and net loss for Q1 were worse YoY: operating loss increased to 16% of revenue as opposed to 11% a year ago, and net loss widened by ~$7 million (~30%). That might not sound too shocking, as the first quarter did boast unprecedented challenges, but Shopify’s annual incomes are a bit more shocking.
Revenues for Shopify are starting to trend exponentially, crossing the half-billion-dollar threshold in 2017, and triple that already by 2020. Revenues are expected to continue growing at a similar, high-30% rate as the adoption of e-commerce continues to rise as opposed to traditional retail in the upcoming years.
Yet Shopify’s net losses are only becoming worse and still show signs of increasing again for this fiscal year, based on Q1 net loss and operating loss widening YoY. Annual net loss has doubled since 2018 and is six times that of 2015’s loss of $18.8 million; that’s moving at nearly the same rate as revenues, but in the opposite direction.
But Q1 historically is Shopify’s “best” quarter aside from Q4; revenues have shown quarterly growth in Q2 and Q3, but also wider net losses in each of the two quarters compared to Q1. If this trend continues, albeit under different circumstances potentially for much of the remainder for the fiscal year, Shopify could easily continue its trend of deteriorating net losses.
Shopify suspended its annual guidance based on unknowns within consumer spending habits, rate of adoption of such spending habits to e-commerce, and rate of transition of brick-and-mortar retailers to e-commerce. All three of these could adversely impact Shopify’s bottom-line results – less consumer spending per person could mean less revenue unless the volume of consumers shopping offsets that, and reopening could have channeled more traffic in brick-and-mortar locations during Q2 as some groups were eager to return to a more normal lifestyle.
Shopify could also benefit from those three if the pandemic has accelerated consumer spending online only and if more consumers choose to spend online (as well as more merchants from brick-and-mortar locations choosing to sell online). No matter which way, Shopify sees a benefit from those three factors it has already outlined; rising costs within general operating expenses as well as R&D will continue to cut into revenue growth. Total operating expenses are on a consistent upward trajectory and have shown no signs of plateauing. Understandably so. As the platform continues to grow, general operating expenses should also grow, as has been the case. are focused on expansion and innovation, and with a highly competitive e-commerce environment, costs in R&D are unlikely to reduce anytime soon.
Assuming costs won’t plateau as Shopify aims to continue innovating and expanding in conjunction with revenue growth, it could find it difficult in reversing its widening net losses. Especially as (and potentially for the fiscal year) transitioned to lower-priced plans. If merchants are resorting to cost cutting by downgrading their plan on Shopify, yet are still seeing benefits from increased adoption of e-commerce, those merchants would most likely be more hesitant to re-upgrade and spend more in the future.
…And Fundamental Valuations Are Worse…
Aside from Shopify’s financials, its fundamental valuations, namely forward EV/EBITDA, forward P/S and forward P/E, have it as one of the most overvalued stocks on the market today. It’s not just the fact that Shopify’s market cap has tripled since March – it’s more so that these already somewhat sky-high valuations have now went into outer space.
Before the pandemic, Shopify’s EV/EBITDA sat around a whopping 500 multiple, a seemingly ridiculous figure for a company generating a negative $100 million annual EBITDA (still ridiculous even if that’s positive). Yet that valuation now sits at an over 2,000 time multiple, based off a forward annual EBITDA of about $50 million. But here’s the kicker. Shopify might not even get close to that annual EBITDA target, causing a much further overvaluation here, as Q1 already posted a negative $44.8 million EBITDA.
Shopify’s forward P/S is still quite shocking, trading at over 56 times sales. During the March selloff, forward P/S was a much more “reasonable” ~18, which is still severely overvalued. P/S, forward or trailing, is still a basic ratio and doesn’t necessarily account for Shopify’s rapid revenue growth rate. Piper Sandler believes that revenues could quadruple to $12 billion in five years’ time. Even with that revenue growth in mind, Shopify’s forward P/S still looks grossly exaggerated.
P/E is probably the most widely looked-at ratio. From a forward P/E standpoint, Shopify trades at just under 2,000 times forward earnings, back to where it had been in January, when shares were just above half of today’s level. So forward earnings estimates are half of what they had been in January, after being sliced as the pandemic hit. Yet that’s what makes it particularly troublesome. Shopify is trading much closer to that January multiple even as revisions were dropped significantly. With no guidance and uncertain circumstances for the remainder of the year, dropping earnings estimates again would only push forward P/E far past 2000.
…But None of This Matters
At this point, it’s quite obvious that Shopify doesn’t fall within “normal” valuations and shouldn’t be traded as such. When looking at Shopify’s fundamental metrics, none of them are anywhere close to resembling a “normal” range.
Shopify has near exponential annual revenue streams, but nearly a mirror picture within its net losses. That hasn’t affected the performance of the shares at all, and neither have any of the aforementioned bloated multiples.
Sure, I might have just spent nearly a thousand works talking about Shopify’s financials and fundamentals, but, honestly, they’re quite meaningless. Regardless of the “bubble” or outrageous valuations, this is not the first time a company has traded on wild valuations, and kept rallying. Tesla’s (NASDAQ:TSLA) P/S looked very similar back in 2013, when its exponential growth was just beginning, and shares were trading at nearly one-tenth then of what they are today.
So how does the 2013 Tesla compare to 2020 Tesla? Well, annual revenues for 2013 shot up to $2 billion from $400 million in 2012, and now revenues are over 13 times 2013’s figure. And Tesla is still yet to show a net profit, even with that rapid revenue growth; shares have still soared since then. Valuations with P/S have settled, but it didn’t take shares falling off a cliff to do so. Once Tesla’s revenue growth went exponential, valuations came back to Earth, but still remained much higher than that of peers, typical for a growth stock.
Shopify’s revenues didn’t see such a boost as Tesla’s did back in 2013, but Shopify is already on that exponential trajectory with its revenues. Sure, its valuations might look far out of line, but it’s just the beginning. Growth stocks are always valued differently, and so are exponential growth stocks, especially during the beginning phase.
Shopify also is surrounded by a flurry of good news – partnerships with Facebook (FB), Pinterest (PINS), and Walmart (WMT), raised price targets, and outperform ratings. Continued positivity is unlikely to cause shares to cave in in the near term, while long-term exponential growth is still the foremost figure behind the name. While there could be some consolidation in shares in the near term due to profit taking or eventual shorting due to some investors believing in a “bubble”, the long-term growth story of Shopify looks to only have just begun. Think of Tesla in 2013 – how many people would have seen shares at $1,000 in seven years? So the question here is where is Shopify in seven years? $2,000? $3,000? Seven years is a massive stretch of time when many are playing the game day by day.
The pandemic has transferred Shopify’s GMV from a PoS to an e-commerce setting, a trend that SHOP should continue to capitalize on in the future, as e-commerce adoption is only expected to grow. Shopify’s financials aren’t the best, with net loss growing opposite revenues, and fundamentals are quite honestly shocking. But none of that matters.
Shopify is just breaking into stride in its exponential growth, and valuations aren’t going to show just where this stock will be in the long-term picture. Shopify’s valuations, especially that in the P/S realm, are very reminiscent of a budding Tesla in 2013, and seven years later, Tesla has outshone nearly everything and paved its way into becoming a fan-favorite, “cult”-style name.
So although Shopify’s valuations place it as one of the most overvalued stocks based on that and that alone, shares still have room to run. But that’s on a long-term picture, a three-, or five-, or seven-year, or even longer picture. Those playing this name day by day could be calling for shorts and overvaluation like the boy who cried wolf, but in a long-term game, Shopify could be on the cusp of breaking into its full potential.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.