Are Shopify’s Stock Offerings a Sell Signal?

Shopify (TSX:SHOP)(NYSE:SHOP) has dipped considerably in recent weeks from its highs. Here’s why the company’s equity raises could have something to do with this.

| More on:
question marks written reminders tickets

Image source: Getty Images

Since hitting a high of more than $1,900 per share earlier in February, Shopify (TSX:SHOP)(NYSE:SHOP) stock sold off significantly in the past few weeks. One of the key reasons for this? Yet another stock issuance at a discount to its stock price at the time.

This 13% decline from its peak to yesterday’s close isn’t truly game changing. However, investors may be starting to become concerned with the pace at which Shopify has issued shares of late. Here’s why.

Stock offerings inherently bearish — sometimes

Numerous stock offerings within a short window of time can be taken by the market as a bearish signal, as companies tend to issue shares when they believe the market is over-pricing their stock.

Issuing shares at too low a valuation could provide significant dilution. However, at higher prices, the dilution effect for the dollar amount received is minimal. If a company believes its stock price is elevated to a degree that doesn’t make sense, issuing as many shares as possible before the window of opportunity closes is what most management teams will want to do.

The fact that Shopify has tapped equity markets three times in the past nine months could be concerning. Indeed, investors could be worried that Shopify’s management team thinks its stock is overpriced. This stock carries a valuation in the nosebleeds. It’s not a leap to suggest this could be the case.

I said sometimes

However, investors need to remember that one of the great things about Shopify is the company’s aversion toward debt. Indeed, Shopify has managed to grow at its incredible pace via tapping equity markets along the way. The company’s debt load is relatively microscopic compared to its market capitalization. Shopify’s managed this by focusing on equity markets for capital over the years.

Shopify has a little less than $1 billion in debt, but more than $6 billion in cash. Some investors may be concerned that these issuances are not needed right now. In other words, Shopify’s tapping equity markets when it doesn’t need to. If one believes the stock price will go up over time, why not wait to raise money at higher prices?

However, a lot of capital will need to be deployed to fund this growth in the near-term. Accordingly, investors bullish on Shopify’s growth potential may like a bigger war chest. The ability to pursue acquisitions or aggressively go after new markets, that’s a good thing.

For long-term investors, Shopify’s a world-class company with tons of upside. I’m not necessarily worried about these equity raises, and think they’re net beneficial to Shopify over the long haul.

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 Chris MacDonald has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

More on Tech Stocks

tech and analysis
Tech Stocks

2 Top Tech Stocks Investors Should Consider Buying Right Now

Tech stocks such as Sierra Wireless and Open Text are well positioned to deliver outsized gains to investors in 2022…

Read more »

cup of cappuccino with a sad face
Tech Stocks

Shopify (TSX:SHOP) Stock Has Been a Bloodbath

The share price of the TSX’s tech phenomenon could still plunge if the bloodbath continues due to the slowdown of…

Read more »

sad concerned deep in thought
Tech Stocks

Tech Stocks Crumble: Is it Time to Buy?

Shopify is coming down from its pandemic highs as its business falters, but BlackBerry's business is just gaining steam.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Tech Stocks

This 1 High-Growth Stock Just Got Irresistible

Despite a challenging macro environment, Lightspeed continues to post strong growth, which could help this high-growth stock stage a sharp…

Read more »

exchange-traded funds
Tech Stocks

Buy the Dip: 3 ETFs That Have Taken a Beating in 2022

Three prominent TSX ETFs trades at bargain prices in 2022 because of their significant exposure to the slumping technology sector.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Tech Stocks

Lightspeed Stock Gains 10% Post Q4 Results

Lightspeed stock gained on the back of stellar results in Q4 of fiscal 2022. Should LSPD stock be part of…

Read more »

Man data analyze
Tech Stocks

Tech Selloff: 3 Growth Stocks Available at Pre-COVID-19 Prices

Tech stocks such as Shopify and Zoom are trading at a much lower multiple due to the ongoing selloff in…

Read more »

TSX Today
Tech Stocks

TSX Today: What to Watch for in Stocks on Friday, May 20

The ongoing strength in the commodity market could help TSX Composite to continue outperforming its U.S. peers in the near…

Read more »