Shopify (TSX:SHOP) stock is down from its pandemic highs but is climbing back. Hear about the company’s valuation, management and stock price from Motley Fool Canada analysts Iain Butler, Jim Gillies, Buck Hartzell, and Nate Parmelee.
Transcript
Jim Gillies: Do you think Shopify is a good buy at the current valuation?
Iain Butler: Well, I wouldn’t ever use valuation as the underlying thesis for buying Shopify [laughs]. That would be my suggestion there. It’s not cheap. I think it’d be one that you turn to the financials and you get turned off pretty quickly still, despite fantastic growth numbers all around. Everything I see about that company though, they are just expanding their tentacles quarter after quarter and building out this robust offering. That certainly makes me intrigued by what’s ahead over the next five years.
My stance has not changed one iota on the company’s direction and its ability to continue expanding in e-commerce. The dang valuation is the issue. If you could just close your eyes and think about the company and where it’s headed, that’s the best way to do it. You’ve got to have a five-year mentality about it because it’s probably going to be volatile. We’ve had a nice run of late over the past six months or even a year. That’s probably going to be not nice at some point. I don’t know. I really like what the company is doing as I understand it and the business. I’m less keen on the valuation, but it’s one where I put my David Gardner head-on and ignore the valuation and just want to see the company succeed.
Nate Parmelee: As you say, it’s an extreme example of what is the underlying earnings power if you start to normalize some of these expenses, particularly R&D. R&D cannot grow the way it has the last five years forever or it’ll be more than revenue. It’s just the growth has been ridiculous. At some point it comes back down into something probably more normal even for a tech company. It’s almost as big as their SG&A at this point. Whereas just two years ago it was half or three years ago, it was about half. It’s 80% or something now of SG&A expense, it’s not normal. It’s one of those where it really does require going in and digging through the pieces and thinking about it. If you’re going to try to actually value the underlying earnings.
Iain Butler: The return on that R&D probably isn’t going to become evident for years. They would do some stock issuance through the crazy times when the stock was hurdling higher as they should have, they loaded up their balance sheet with cash and that’s smart. That’s what you should do. Now they’re deploying that cash into bolstering their offering. Also smart if they’re able to generate a return in the years ahead. That’s what we need to find out.
Buck Hartzell: I had something in there. You guys know Shopify better than I, because it’s good. I mean, we’re having a discussion here so we can have divergent opinions.
Jim Gillies: No, we might fall in line! [laughs]
Buck Hartzell: I agree with the value stuff. I would say the bigger question I think then for you guys is, it’s a bet on the person who’s leading this company?
Jim Gillies: Correct.
Buck Hartzell: If you believe in Tobi and his abilities and leadership, then you’re probably interested. I would say as somebody who has looked at it in the past, I’m not a big fan of Toby and I think there’s a question on whether this business is being run for insiders or for shareholders. Look at stock-based comp, I’ll give you one hint. Look at that over time. But anyhow, I’m just saying I’ve listened to speeches given by Tobi and read some of his things. He’s not the leader I like to align with. I would just say for me, it was an easy pass looking at leadership.
Jim Gillies: Have fun staying poor!
Iain Butler: They’ve done an interesting thing where so I agree, and I think Toby and I share public speaking abilities. I will say from any time I’ve heard them in more recently, he’s been better, but especially back in 2016, 2017, it was really choppy on a conference call with him. But they do have a very eloquent No. 2 that has taken over all public engagement duties. Harley Finkelstein is his name and much better suited to speaking in public. I wanted to also go back to that huge run. In hindsight, good gosh, why didn’t we blow this thing out at 70 times sales? That was a first experience for me. I had never been part of anything like that.
Again, in hindsight, it was mismanaged, but I just would continually go back to the company and the company was doing great and it was like, close your eyes and just think that the company is going to continue [laughs] to build and evolve and expand its tentacles and let the multiple do as it does and the multiple wasn’t very friendly, so it crashed. We’ve taken that lesson, I think, and then maybe done some things that other Foolish services have not done like pushed Nvidia (NASDAQ:NVDA) out, pushed the Trade Desk (NASDAQ:TTD) out of Stock Advisor, so it was a bit of a learning experience and frankly, I hope I get delivered again.
Buck Hartzell: In hindsight is easier than it is when you’re in it, but when interest rates go to 0%, the multiples particularly for growth stocks just go hyperbolic.
Jim Gillies: Yeah.
Buck Hartzell: It’s just the fundamentals, the way it works, but the reality is discount rates aren’t going to be 1% or [LAUGHTER] they’ve gone up, so those stocks that were priced for all that growth are the ones that took the biggest hit. By the way, it doesn’t mean I’m right about Shopify is going to be a bad investment. I’m just saying: If I was invested in it, I would want to feel really confident in the leadership abilities of Tobi Lütke, and that’s just not me. It doesn’t mean I’m right. There’s plenty of people who I have questioned on leadership that go on to do good things. It’s just where I’ve fallen on it.
Jim Gillies: Yeah. Well, of course, as Iain already well knows that Tobi Lütke is the greatest Canadian since Don Cherry and Terry Fox, so [laughs]
Buck Hartzell: I just insulted the whole country there [laughs]
Jim Gillies: Not even remotely, I will say no to Iain’s point as he’s wearing the hair shirt a little bit here. How many times did you make Shopify a best buy now at 70 times sales? I haven’t looked, but I’m willing to bet it’s zero.
Iain Butler: Zero.
Jim Gillies: It’s not that we were unaware of the valuation. No one likes to get off the ride and again, our whole stance on Shopify since early 2016 has been: “Put this away. Look at it in 5, 10, 15, 20 years” because that was the Rule Breaker-esque type, so we are what? Seven years into that, six and a half years into that, so I’m fine with it. Go ahead.
Iain Butler: Ten times is good over seven years, 50 times is over five years is better, but here we are.
