The Shopify Stock Bubble Can Only Keep Getting Bigger for so Long

I’ve been pretty hard on web store provider Shopify (NASDAQ:SHOP), but investors, and the Shopify stock price, have ignored me. Since tech bottomed at Christmas, Shopify shares have risen from less than $130 to their March 13 opening bid of $202. That gives the company a market cap of $22.4 billion, on 2018 revenue of $1.07 billion.

Source: Shopify via Flickr

As far back as 2017 I predicted this would all end in tears, citing a report from short-sellers Citron Research that called Shopify a scam at $60 per share. More recently I noted its lack of operating cash flow and use in drop-ship scams. 

All this is still true. But it doesn’t disturb the bulls. One recent story calls Shopify a “virtual go-to destination for aspiring entrepreneurs and small businesses.”

Celebrity, Pot and Shopify Stock

Chief operating officer Harvey Finkelstein was recently on the TV, touting Shopify’s use by celebrities such as Kylie Jenner and Drake, but also hyping the software’s use by Canadian pot sellers.

Shopify now touts itself as a Software as a Service (SaaS) ecommerce platform, bragging about the success of merchants like Jenner without noting how little the company makes when one of its customers succeeds.

That’s because Shopify is like a casino, in that those big buildings aren’t built with money from winners. Shopify’s results are fueled by 20,000 app developers and agencies that are selling their tools to Shopify sellers. Shopify gets a fat 20% off the top from those sales.

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Inside the Numbers

For the quarter ending in December Shopify lost $12 million, 1 cent per share, on revenues of $343.8 million. The company’s press release noted this was 54% ahead of the previous year, making the loss irrelevant to the investment case.

Shopify divides revenue into “subscription solutions,” which involve use of the Shopify software, and “merchant solutions,” sales made through the app store. It’s the app store revenue that’s been growing fastest, rising 63% year over year from $129 million in the last quarter of 2017 to $210 million in the last quarter of 2018.

I like to look at cash flow, which was a positive $269 million for the year. But operating cash flow was just $9.3 million. The big number was $1.04 billion. That’s how much cash went on the books from the public offering. Shopify is rising on the money from its own investors.

Shopify’s release also details how its income flows. It shows 54% of what comes in is gross profit, with sales and marketing expenses representing 26% of revenue. A lot of Shopify’s money goes into finding new customers.

The initial reaction when the Shopify numbers came out last month was negative. Analysts were expecting $55 million in earnings. The company said it was “investing heavily” in augmented reality and virtual reality applications, but total investment in research was $67 million. The stock now trades above where it was before earnings.

The Bottom Line on Shopify Stock

I avoid going short on anything because it’s easy for bulls to hold shares from short sellers and drive a target’s price up. My favorite aphorism is that of the 19th century speculator Daniel Drew, who said of short sellers “He who sells what isn’t his’n, must buy it back or go to pris’n.” Drew ended his life broke.

On the other hand, I also avoid speculation for the sake of speculation. If you buy Shopify now, you’re paying over 20 times sales for a company without profits, most of whose cash flow comes from sale of its own stock.

I may be missing a profit rocket, but I say thanks but no thanks.

Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentione