I’m Not Ready to Pull the Trigger on Shopify, But Here’s How to Play It

You remember Shopify (STORE) , not you ? The go-to software and services provider for businesses that need to establish and maintain an e-commerce presence. The stock was already attractive before the pandemic. Then, given the nature of its business, Shopify became an immediate darling for pandemic investors, surging from a low of around $305 in March 2020 to an intraday high of just under 1,763. $ on November 19, 2021. That’s a 20-month 478% run for those tallying home scores.

On Friday night, SHOP closed at $603.18, both down 65.8% from that November high and up 18.3% from the March 2021 low. After trading up to at $780 since. The words that come to mind are “crazy” or “volatile”. That said, at Friday’s closing price, SHOP traded at 186 times (12 months) forward earnings.

And there is news. Early Monday morning, Shopify announced a number of proposed updates to its corporate governance structure as well as a stock split. The company will seek shareholder approval for these proposed changes at a special meeting of shareholders scheduled for June 7.

The Nitty Gritty

Shopify has two classes of inventory. The Class A (SHOP) shares that you all know and follow that have one vote per share…and the Class B shares that have 10 votes per share. Currently, Class B shares hold a position of control equivalent to approximately 51% of Shopify’s electorate. Under the current structure, Class B shares automatically convert to Class A shares if the proportion of “super” voting Class B shares falls below 5% of total outstanding shares. Currently, Class B shares represent approximately 9.5% of all outstanding shares.

Under the proposed amendments, the existing Class A and Class B shares will remain outstanding and their terms will not be changed. If these proposed changes were passed, co-founding CEO Tobias Lutke and his affiliates would agree not to transfer the existing Class B shares without Lutke retaining voting control over the shares. This would prevent an intergenerational transfer of power. A new ‘founder’ share will be created for Lutke which, combined with his existing Class B shares, will increase his voting control to 40% from 34%. Lutke retains the Founder’s Share for as long as he stays with Shopify as an officer, board member, or consultant.

In addition, the company is also offering a 10-to-1 stock split of the company’s Class A and Class B shares. If passed, shareholders will receive nine additional shares for each share (A or B) already in possession after the close of business on June 28. As mentioned, the company will seek shareholder approval on June 7. A two-thirds majority vote of all shares cast will be required to pass the proposal, while separately a simple majority of all votes cast for each class of shares individually will also be required, excluding votes controlled by Lutke.

Fundamentally…

Shopify is expected to release the company’s first quarter financial performance in mid-May. Expectations are all over the map for these guys, so it’s very hard to know where they’re going. I see expectations for GAAP EPS ranging from a loss of $0.56 to a loss of $0.39, with adjusted results expected to be between $0.76 and $1.01. The adjusted compensation for the first quarter of 2021 is $2.01. I see revenue generation expectations as low as $1.24 billion and as high as $1.57 billion. The consideration would be $988.7 billion. Year-over-year revenue growth that year increased by 110%.

The rate of acceleration of the company’s annual sales growth dropped over the next three quarters to 57%, 46% and 41% in order. At the low end of the range…$1.24 billion, growth would slow further to 25.4%. The company needs to generate revenue of $1.394 billion or more in order to break the trend of slowing revenue generation acceleration.

During the last reporting period, which ended on December 31, Shopify, even with declining sales growth, was indeed supported by improved operating cash flow, leading to a free cash of $1.86 per share. The company had an almost eye-popping net cash balance of $7.789.6 billion when short-term investments are included (which I do). This brought current assets to $8,539.3 billion. Short-term debts? $702.7 million. I am not joking.

The company’s current ratio at the end of the year was an incredible 12.15. “Healthy” doesn’t even begin to describe that track record. Total assets of $13,340.2 billion barely eclipse total liabilities of $2,206.8 billion. The company does not abuse the use of “goodwill” or other intangible assets to strengthen the total assets. Total debt was $911 million, which the company could pay out of pocket while maintaining an impressive current ratio. To say that SHOP passes the Sarge test makes that record an injustice. The company is obviously well managed. Additionally, tangible book value worked (as of Dec. 31) at $84.45 per share.

My minds

This one is difficult. I like the fundamentals that support the business. I hate valuation. I wonder why the proposals are made. It seems to me from afar, and I don’t know if I’m right (but I’m considering the stock for a trade/investment and that’s my homework) that for some reason the power of the current CEO is dying. be institutionalized and shareholders are being noticed with a stock split to vote for the changes. The company talks about the affordability of stocks and said this stock split aims to make stock ownership more accessible to all investors. I can’t help but wonder if that’s the reason, so where was that sentiment six months ago when stocks were trading above $1,700. It really puts some hesitation in my trigger finger.

After trading higher ahead of the opening bell in New York, the shares are trading slightly above and below “unchanged” shortly after the bell rings. I must say that I need to see the first quarter results and hear the company’s conference call, which will take place before the June 7 vote. I just don’t trust the reasons. Neither does Wall Street, apparently. At least that’s the knee jerk.

The stock is trading around $600. Incredibly on May 20, $400 put options, which expire after gains, can still be sold for around $7. Maybe it’s gambling. I’ll cover it when I have a profit though. I wouldn’t let that one sit down. This stock can and could do anything for five or six weeks.

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