Shopify Inc. (TSX:SH)(NYSE:SHOP) is easily Canada’s hottest technology stock, having gone public just last month. The U.S.-listed shares have rocketed past their IPO price of US$17, even trading above US$40 at one point.
But not everyone is sold. Detractors rightly point out that the shares are very expensive, and that Shopify can’t possibly keep up its rapid growth rate. Stronger competitors could easily emerge. All of this could cause a dramatic fall in the share price.
The skeptics point to one other factor: Shopify has been posting net losses for years. Last year alone the company lost $22.3 million. Yet that doesn’t mean Shopify isn’t unprofitable. We take a closer look below.
How Shopify is actually profitable
Small technology companies, especially fast-growing ones, are notorious for posting losses. And they always have plenty of excuses. Some claim that profits will come once scale is reached. Others claim that growth should be the number one priority. But here’s the problem: all too often, the profits never arrive, even after the company gets much bigger.
So, is Shopify one of these companies? Well, to answer this question, let’s take a closer look at the numbers.
Last year Shopify spent roughly $46 million on sales and marketing, and increased its customer count by 51,000. So, it cost the company a little less than $1,000 to attract each new merchant. And each merchant generates roughly $600 in gross profit per year. That’s not a bad return at all.
With those kinds of numbers, it makes perfect sense for Shopify to maximize its sales & marketing spending. Ideally, all profits should be poured back into these efforts—or perhaps more, if there’s enough money available.
And that’s exactly what Shopify is doing, which is why it’s posting these losses. Not to worry though, the company can turn on the profits’ tap whenever it wants. Now is certainly not the right time.
We’ve seen this plenty of times before. For example, Amazon posted losses for years, and still makes very thin profit margins, all in the name of growing the top line. And as Amazon gets bigger, it becomes harder for competitors to muscle their way in. It’s a virtuous cycle that has benefited shareholders for years. Shopify would do well to emulate this.
Should you buy Shopify?
This doesn’t mean you should be buying Shopify. The company is still very expensive, and has very high expectations.
But you shouldn’t let Shopify’s net losses deter you from buying the stock. And if you do own shares, you should be waiting very patiently for the company to post a profit.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair has no position in any stocks mentioned.