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Keeping an eye on Shopify

November 29, 2022

At the moment I think of what we are doing as keeping in training. Shopify had a terrific bull market from 2016 and a dramatic sell-off since the November 2021 peak. The wisdom of hindsight makes it clear that the buyers had become overexcited but there has now been a massive correction with the shares falling from a peak $163 to a recent low of $23.63 and a current price round $38.

My impression is that all the things that made Shopify such an exciting share on the way up are still in place. This is a business led by exceptionally talented people operating at the cutting edge of technology and making a real contribution to the way in which e-commerce operates around the world.

The role it is seeking to play is a large one. Shopify aims to become the one stop platform for businesses of all kinds to launch and operate e-commerce and multichannel businesses. They are allowing businesses of almost any size to outsource much of what they do to a specialist platform while focusing on what makes their business unique. It is easy to see that there is a large market for such a company.

Sometimes exciting businesses may run too far too fast and this is what seems to have happen to many businesses like Shopify during lockdown, which by confining everyone to their homes while filling their pockets thanks to widespread quantitative easing programmes triggered an unsustainable acceleration in the shift to e-commerce.

We are suffering the hangover and this allied to the fact that the share price also ran too far is responsible for the dramatic fall in price we have seen. It is not an indicator that in some way Shopify has lost its mojo as a business; rather it signifies a necessary reset after a period of overdone exuberance.

Although analysts are still looking for exciting growth there has been a dramatic change in valuation for Shopify. Whereas the enterprise value (market value less net cash) was around 45 times sales on current projections by calendar 2024 it will be nearer five. The business will still be loss making but that is not because it is incapable of making profits but rather because it chooses not to as part of the over-riding focus on growth.

Admittedly, this relapse into loss making is not entirely voluntary. The company is spending heavily on the creation of a fulfilment network which involves spending real money on physical assets and this has coincided with a slowing of demand to put pressure on profitability. I do not see any serious pressure on the company’s finances. Free cash flow has turned negative but is amply covered (some 10 times) by the group’s cash resources. As and when free cash flow turns positive again, possibly not for several years but it will happen, the share price is likely to be much higher.

The chart is looking interesting. We have the makings of a golden cross on the moving averages (rising shorter term average climbing above a rising longer term average) and the Coppock indicator, although still falling is now significantly negative at minus 146. This hardly adds up to a strong buy signal but could suggest that the shares are building a base.

In terms of fundamentals there is a lot going on at Shopify such as international expansion.

International retailers outside of North America continued to grow our overall merchant mix, comprising 45pc of all merchants in Q3 and demonstrating the continued success of our investments. As we continue to expand our geographic reach, we launched Shopify Payments in Finland, Switzerland and Portugal. We launched Shopify Capital in Australia and Shopify Shipping in Italy and France. Also during the quarter, we launched Shopify point-of-sale with integrated payments in Singapore and Finland, which brings the total number of countries where merchants can use our point-of-sale offering to 14.

Q3 2022, 27 October 2022

Shopify is an amazing business

Shopify’s commerce operating system serves as a central nervous system that powers millions of businesses all over the world. If you talk to our merchants, you will hear repeatedly that they love the simplicity of our technology and the experience it offers to their buyers.

Q3 2022, 27 October 2022

It is just a matter of time before investors become excited about the shares again and then it will be onwards and upwards perhaps even to to new all-time peaks


This is still a super nervy market, capable, at best, of two steps forward and one step back. There are moments in markets that scream money making opportunity. This is not one of them, not yet although it may be coming. Transitions take time. It is not that long since we left lockdown for the new era of shortages, inflation and rising interest rates. As with any drama the scenery will shift again but it has not happened yet or if it has we can hardly be sure of that or even whether what replaces it (recession?) will be an improvement.

This is why I like to focus on charts. Fundamentals are a moving target. Any economist worth his salt can make a bull case or a bear case with equal ease; deciding which is the right one is a whole different exercise but charts are more unequivocal. A buy signal is a buy signal. It does not come with a guarantee that it will work or we would all be millionaires but at least it gives us something black and white with which to work.

We don’t yet have the sort of buy signals for which I am looking.

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