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Shopify surges to within $1B of Royal Bank for title of most valuable company in Canada

Shares in Canadian e-commerce firm Shopify Inc. surged on Wednesday after the company said more and more businesses are signing up for its online selling platform during the COVID-19 pandemic.

The Ottawa-based company reports in U.S. dollars and says it took in $470 million in revenue in the first three months of 2020. That’s up from $320 million in the same period a year ago.

Analysts who cover the company were expecting revenue to come in at around $442 million.

Shopify’s shares have been one of the few successes on the TSX of late, with the value of the company more than doubling since the start of April. Shares in the company gained another six per cent on the TSX on Wednesday to trade at more than $1,000 a share.

At that price, the company is worth just over $120 billion. That’s enough to make Shopify the second-most valuable company in Canada, behind the Royal Bank of Canada, which is just shy of $121 billion at its current stock price.

CEO Tobi Lutke says the company is doing everything it can to help businesses start selling online to stay afloat.

“The spread of COVID-19 is going to be a tough time for all entrepreneurs,” he said in a statement. “We are working as fast as we can to support our merchants by re-tooling our products to help them adapt to this new reality.”

Two weeks ago on Twitter, the company’s chief technology officer, Jean-Michel Lemieux, noted the surging demand and said the company was seeing sales volumes on its platform that rival Black Friday.

While sales were booming, the company still posted a net loss of $31.4 million or 27 cents a share compared with a loss of $24.2 million US or 22 cents per share during the first quarter of 2019.

On an adjusted basis, however, the company posted a profit of $22.3 million or 19 cents per share for the first quarter of 2020 compared with an adjusted profit of $7.1 million or six cents per share for the same period last year.

That adjusted earnings figure strips out certain costs from the ledger, including “stock-based compensation expenses and related payroll taxes as well as amortization of acquired intangibles and related taxes,” the company says in the fine print of its earnings release.

Canada’s economy is renowned for its strong and valuable banks, but from time to time, a company other than a bank has claimed the title of most valuable. In the past, companies such as fallen tech giant Nortel, RIM (better known as BlackBerry), energy firm EnCana, fertilizer giant PotashCorp, drug company Valeant and others have pulled off the feat.

“Those are now names that don’t either exist anymore or [were] very much cut off at the knees,” said Barry Schwartz, chief investment officer at Baskin Wealth in Toronto.

“When you challenge the market cap of the Canadian banks in Canada, it’s never worked out very well.”

While he calls the company a “terrific success story” for a Canadian economy that is too reliant on banks and oil companies, he says the company’s stock price is too expensive considering its scant profitability.

“I can’t say enough good things about what they’ve done, and the wealth that they’ve created, but the problem is the value,” he said.

Schwartz values stocks based on their future potential to make profits, and he doesn’t see Shopify ever being profitable enough in the future to warrant the company’s stock price today. Investors have “pulled forward all good news until the end of time,” in justifying the current stock price, he said, so he worries that unexpected bad news down the line will wallop the stock.

He also notes that as it grows, the company will face more competition from a formidable challenger: Amazon. “They’re up against some very heavy hitters and I don’t think those guys are going to let Shopify win everything.”

“Buying it here at that valuation, you’re essentially saying, ‘I don’t care.'”

CBC

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