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Can Anything Stop Shopify Inc. Stock?

If there’s a growth stock in Canada right now that can keep up with Shopify Inc. (TSX:SHOP)(NYSE:SHOP), I’d sure like to hear about it because this baby is on fire.

Can anything stop Canada’s tech darling from rocketing to $100 in 2017?

I’d say its valuation could, but I’ve been wrong twice in the past year about Shopify stock; I certainly don’t want to become one of those permabears that constantly appears in the business news pooh-poohing a particular stock and looking hopelessly out of touch with the world in the process. So, I won’t.

Instead, I’ll retrace some of my comments and concerns about Shopify’s stock in hopes of finding some ammunition for changing my tune.

When I first wrote about Shopify back in April 2015, I was concerned about its valuation based on the fact that investors were paying a premium for the company’s subscription revenue — the more profitable of its two revenue streams.

I mentioned the concerns of e-commerce expert Abe Garver, who suggested at the time that the typical software-as-a-service (SaaS) company had an enterprise value of 6.8 times revenue. Assuming Shopify’s revenues at the time were 100% SaaS or US$205.2 million, its market cap should have been US$1.4 billion, not US$2.4 billion.

However, they weren’t 100% SaaS, but more like 60%, which means the 40% of its revenue coming from its merchant solutions business (gross margins less than half those of SaaS at 78.1%) was being valued at far too rich a premium.

Fast forward to Shopify’s fiscal 2016 numbers, and here’s how things have changed.

Shopify’s subscription revenue now accounts for less than half the company’s total revenue (48.4%) with its merchant solutions segment providing the remainder. The good news is that the subscription business’s gross margins actually increased 100 basis points to 79.1% in fiscal 2016; unfortunately, the gross margins for its merchant solutions business declined by 380 basis points to 30.1%.

The downside of this is that Shopify makes almost 50% less from a dollar of revenue generated by its merchant solutions business.

For example, if it generates US$100 million in revenue, all of it of the subscription variety, its gross profit is US$79.1 million. If it makes US$48.4 million from subscriptions and US$51.6 million from merchant solutions, its gross profit is US$53.8 million, or 32% less for the same US$100 million in revenue.

In a best-case scenario, those numbers get reversed.

However, because Shopify is growing so fast — 90% year-over-year increase in revenue and 99% year-over-year increase in gross merchandise revenue — a full-year operating loss of US$37.2 million hardly seems like a huge concern, especially when it has US$392.4 million in cash on hand and no debt.

In addition, Fool.ca contributor Jacob Donnelly, a big fan of Shopify stock, is high on the company because it continues to lower its operating leverage, which, on a non-GAAP basis excluding stock-based compensation, was down to 58% in fiscal 2016 —  200 basis points less than a year earlier.

Currently trading around 14 times sales, value investors probably won’t be interested, but I’ve given up trying to fight the roll Shopify stock is on.

Is Shopify Canada’s top tech stock? I believe it is.

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Fool contributor Will Ashworth has no position in any stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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