Business Maverick

Business Maverick

Shopify’s 50% Slump Proves That It’s No Amazon

Signage is displayed at the Shopify Inc. office in Waterloo, Ontario, Canada, on Sept. 13, 2018. Shopify Plus, the company's highest-tiered subscription, is attracting migrations from other platforms. In 2Q, more than 50% of customers that were added to the service were new to the Shopify platform. Photographer: Cole Burston/Bloomberg

Shopify Inc. has been called “Amazon Junior.” Those shoes are proving too big to fill.

Both companies are seen as bellwethers for the e-commerce sector and they are index heavyweights, too: Shopify is 3.1% of Canada’s benchmark stock index and Inc. is 3.7% of the S&P 500.

Unfortunately for Shopify investors, that’s where the similarities end.

Shopify has slumped 50% this year, while Amazon is near break-even

Shopify provides the software and other services that allow small businesses to sell on their own websites, an increasingly competitive business that skeptics say is becoming commoditized. Amazon is not only a mammoth online retailer in its own right and offers a marketplace for smaller businesses, but it also operates a fabulously profitable cloud-computing business.

That helps explain why Shopify has been routed this year along with many other high-multiple software stocks — falling 48%, erasing about $83 billion in market value. Amazon is down less than 1%.

“They are two different businesses,” said David Trainer, chief executive officer and founder of research firm New Constructs. “Even with the recent stock price decline, shares remain priced for Shopify to be bigger than Amazon. Shopify remains significantly overvalued.” Trainer has one of two sell ratings on it, according to data compiled by Bloomberg.

Both stocks received a huge lift when the pandemic hit in 2020 and consumers turned en masse to online shopping. But Shopify has given back most of those gains as investors take a closer look at the fundamentals.

The company’s growth, while still impressive, is slowing. In its last earnings report, Ottawa-based Shopify warned that sales growth will be lower in the first quarter of this year. For the year, analysts expect sales to increase 31%, down from 57% last year.

Without a true cash-cow business like Amazon Web Services, Shopify’s profitability is modest and its valuation is sky high. The company’s enterprise value, which includes net debt, is more than 140 times estimated earnings, compared with less than 19 for Amazon.

That’s not uncommon for a young company that’s growing, of course. But therein lies the problem for the stock: Software providers with rich valuations are one of the market’s most out-of-favor groups. It’s a combination of a retreat from high-valuation stocks because of rising interest rates, skittishness about companies that aren’t very profitable, and slowing growth rates after the pandemic pulled forward demand for some tech services.

Read more: Shopify’s Shrinking Valuation Summons the Curse of Canada Tech

Despite the brutal selloff, some Shopify bulls are undaunted.

“If you can look past the next couple of years, you see that there is still good secular growth at an expensive price,” said Jordan Stuart, client portfolio manager at Federated Hermes. “A lot of portfolio managers are looking at large cap indexes, saying I have that exposure, what else do I want to own? I’ve got to own something different and Shopify is going to provide that opportunity.”

Tech Chart of the Day

Big Moves | Tech stocks have moved up or down by at least 1% on 73% of trading days this year

Tech investors have been treated to a wild ride over the first three-plus months of the year. The Nasdaq 100 Index has closed higher or lower by at least 1% on 73% of trading days in 2022, which would be the highest percentage in two decades if the trend were to continue for the remainder of the year.

Top Tech Stories

  • Chinese stocks listed in the U.S. rallied on Beijing’s plans to modify restrictions on the data that overseas-listed companies are allowed to share with foreign regulators, easing concerns that these companies could be kicked off American exchanges.
  • Chinese fast-fashion e-commerce startup Shein is weighing a funding round at a valuation of about $100 billion, according to people familiar with the matter
  • Indonesia’s GoTo will give away thousands of shares to each of 600,000 drivers as part of its $1.1 billion initial public offering, setting a precedent for Southeast Asia’s sharing economy
  • Delivery Hero SE said it expected the entire company to hit a measure of profitability next year for the first time
  • French campaigners are successfully winning support in courts to block Inc.’s plans to construct distribution facilities in the country
  • FinAccel Pte, the parent company of fintech platform Kredivo, has acquired a majority stake in Indonesia’s PT Bank Bisnis Internasional TB, pitting itself against Southeast Asia’s biggest internet companies for a share of a growing digital banking arena
(Updates share price moves throughout.)

–With assistance from Matt Turner, Jeran Wittenstein and Subrat Patnaik.


Comments - Please in order to comment.

Please peer review 3 community comments before your comment can be posted

A South African Hero: You

There’s a 99.8% chance that this isn’t for you. Only 0.2% of our readers have responded to this call for action.

Those 0.2% of our readers are our hidden heroes, who are fuelling our work and impacting the lives of every South African in doing so. They’re the people who contribute to keep Daily Maverick free for all, including you.

The equation is quite simple: the more members we have, the more reporting and investigations we can do, and the greater the impact on the country.

Be part of that 0.2%. Be a Maverick. Be a Maverick Insider.

Support Daily Maverick→
Payment options