Strictly from a historical valuation perspective, Shopify’s valuation, relative to it’s recent valuation is getting interesting.
Here is a table showing historical & projected (Q1 2018) EV/Sales figures:
EV/Sal Mar Jun Sep Dec 2015 8.9 2016 8.7 8.3 9.9 8.8 2017 13.0 14.3 18.2 13.6 2018 **14.3**
The projected figure includes
- $200 million of sales (Shopify midpoint guidance) for Q1, 2018
- $1.6 billion in cash & marketable securities, which includes the $657 million from the recent stock offering
- The additional 4.8 million shares from the offering and 14 million more for dilution (this is probably too many)
- No change in long term debt
- A stock price of $116
Okay, we’re still looking at a value that is historically high. But it’s no longer outrageously high, and given the cash & marketable securities position of almost $1.6 billion, one could argue that the company is a lot safer than it has been.
Shopify projects sales of about $980 million in 2018, which reflects growth of about 47%, which is significantly lower than historical growth. Their Q1 guidance of $200 million is 57% YoY. Given the lower growth outlook, one could argue that the multiple needs to come down even more.
Assuming the share price, long term debt, cash & marketable securities amounts don’t change and there is about 15% dilution at the end of the year (they forecast $100 million in stock compensation, but I’m too lazy to figure out converting this into shares), the EV/Sales ratio goes down to about 12.5.
So I am asking myself if they’re sandbagging on their sales outlook and if their operating profitability will change. They’ve got a history of underpromising and overdelivering on sales and their future gross margins should be stable if the past is any guide:
GrPr% Mar Jun Sep Dec 2016 54.0% 53.3% 52.7% 52.3% 2017 56.7% 57.3% 58.3% 54.4%
There are also two competing influences on this number. Subscription revenues with higher gross margins and Merchant revenues with lower gross margins. Merchant revenues have now surpassed (in the most recent quarter) Subscription revenues and will weigh on total margins. However, Merchant margins are increasing:
Mer Mar Jun Sep Dec MerGP Mar Jun Sep Dec 2015 15.0 19.5 23.2 35.7 2015 4.2 5.2 5.6 9.6 2016 34.0 43.0 49.7 74.0 2016 8.8 11.6 13.2 23.3 2017 65.3 80.1 89.0 128.9 2017 22.4 28.9 33.1 47.1 Grth Mar Jun Sep Dec GP% Mar Jun Sep Dec 2015 2015 28.3% 26.8% 24.1% 27.0% 2016 126.8% 120.7% 114.2% 107.5% 2016 25.9% 27.0% 26.5% 31.5% 2017 92.0% 86.3% 79.0% 74.2% 2017 34.3% 36.1% 37.1% 36.5%
Regarding adjusted profitability, they intend to forego it and invest in growth (international merchant base, Shopify Plus and the core platform, including using machine learning and connecting merchants to make business better).
Right now, there is quite a lot of fear in the markets, and there are enough reasons, even in this simple analysis, to sell the stock. However, looking out a year or two and considering these figures and the business prospects, combined with a dose of market greed, could make today’s price seem like a bargain.
Now I’m still stuck on what I should sell to pay for more shares of SHOP.