Some businesses are thriving amidst the coronavirus chaos. That’s because their business model was already prepared for such a situation or has benefitted from current restrictions. More customers want or need to use their business now because others have had to close either temporarily or permanently. It can be a hassle, but you don what you have to do in order to get what you need.
One company who has seen a lot of financial benefits during this pandemic is Shopify. The popular e-commerce software giant has seen its shares surge by over 65 percent over April. They have done even better than video conference calling company Zoom— another business whose popularity has skyrocketed during COVID-19.
With its value now at over $100 billion CAD, Shopify has become the second largest company in Canada by market capitalization. The only company that's bigger is Royal Bank of Canada— but even that gap appears to be swiftly closing. Shopify is even doing better than eBay, Etsy and FarFetch.
But that’s not all. Other stock experts have revealed that Shopify’s stock is almost twice what Amazon’s is. Given that Amazon is arguably Shopify’s biggest competitor, this is a big deal for the Canada-born company. Shopify’s stock is currently trading at 38 times consensus estimates on under $2 billion CAD revenue for 2020. While some losses have been predicted, projected profits sit at 54 cents per share in 2021. This gives Shopify a price-to-earnings ratio that is over 1200 times next year’s earnings.
All of this growth is massive— there’s no denying that. But stock experts are concerned about it for a few reasons. First, it’s easy to see that is kind of growth in such a short amount of time is unsustainable. According to Canaccord Genuity analyst David Hynes, the gross merchandise value growth at Shopify’s consumers may not be “as bulletproof as perceived as discretionary spending retreats.” He also says that the stock’s valuation is— to put it bluntly— extreme. Since there’s no way to get there on valuation, downgrading is now taking place.
“These are admittedly crowded trades, but in a tape like this, valuation really only matters at extremes. Investors have lumped Shopify into this group as secular tailwinds and the potential acceleration of the move to online commerce is almost surely a safe bet,” Hynes wrote.
It’s also worth noting that Shopify’s revenue in 2019 was under $8 billion CAD. Moreover, Shopify had operating net losses of over $140 million CAD. But during such terrible economic times, Shopify’s revenue grew by 40 percent in 2019 while gross merchandise volume grew upwards to almost 50 percent.
That’s all good news, right? Well, not quite. According to BNN Network anchor Amber Kanwar, holding the number one market cap in Canada is associated with some sort of curse. The consistently troubled Blackberry held it once upon a time. Other companies that have also claimed the aforementioned honour include Nortel, which remains the largest bankruptcy in Canada’s history; and Valent Pharmaceuticals, a company that has dealt with multiple criminal investigations and fraud accusations since then.
Granted, it all could be nothing more than a mere coincidence. It also doesn’t mean that Shopify will follow this troubling pattern. They could instead very well buck it. The coronavirus pandemic has been unpredictable for businesses, to say the least. When it comes to Shopify— as well as order ecommerce businesses— the stay-at-home orders and the closure of brick and mortar shops has caused many to go the online route for their shopping. But this will more than likely cause a recession, forcing some of Shopify’s customers to either reduce or stop their business.
Will Shopify remain the second largest company in Canada? It’s really hard to say— especially when so much of life is currently up in the air due to this global pandemic. It will be interesting to see how much Shopify will grow during these times, and whether or not the growth will change dramatically long after this pandemic comes to an end.