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Shopify is number one

By Gordon Pape

At the start of the year, I was invited to participate in a survey by MoneyShow.com that asked 100 analysts and newsletter writers for their top growth picks for 2017. My choice was Shopify (TSX, NYSE: SHOP), a young company that focuses on providing on-line marketing solutions at a reasonable price for small and mid-size companies. It was originally recommended in the IWB by contributing editor Glenn Rogers in February 2016 at C$28.24, US$20.57.

I was notified last week by MoneyShow editor Steven Halpern that to this point in the year Shopify is the number one performer among the 100 submissions, with a gain of more than 100%.

My rationale for choosing this stock was that this Ottawa-based company was still very low on the radar screens of U.S. investors despite its rapid growth rate and a listing on the New York Stock Exchange. I expected that to change, although the explosive growth the stock has experienced caught even me by surprise. The shares climbed from $42.82 (figures in U.S. dollars) at the start of the year to a high of $97.48 in early June before being hit by the broad pullback in tech stocks. SHOP closed the week at $86.93 in New York, up 103% for the year to date.

Last year, Shopify had over 325,000 merchants using its on-line platform, including some big name clients like General Electric and Proctor & Gamble. According to the company’s website, that figure has now grown to over 400,000 businesses, with over $34 billion sold through its platforms. Big-name clients are also growing and now include Tesla, Nestle, Red Bull, and Kylie Cosmetics.

First-quarter results saw a 75% year-over-year revenue increase, to just over $127 million. The company said a record number of merchants joined during the quarter. The most impressive financial result was a 62% jump in recurring monthly revenue, to $20.7 million. It’s one thing for a business to sign up new clients, but the key to success in going forward is to lock them in to long-term service contracts.

Like many other tech companies in the start-up phase, Shopify has yet to turn a profit, although it is getting closer. Adjusted net loss for the first quarter was $3.5 million (-$0.04 per share) compared to $5.1 million (-$0.06 per share) for the first quarter of 2016.

For the full year of 2017, Shopify expects revenue in the range of $615 to $630 million and an adjusted operating loss of $6 to $8 million. Revenue for 2016 was $389.3 million so the company is expecting growth in the range of about 60%.

Action now: If you missed out on Shopify at the time of the original recommendation, take advantage of the price pullback to open a small position. If the stock retreats further, add to it. The company continues to grow rapidly and the market is willing to pay a premium for that.

Note that we regard this as a higher risk stock due to its rapid price appreciation.

 

For weekly security recommendations, updates, model portfolios, and investment insights, become an Internet Wealth Builder member. This weekly newsletter, edited by Gordon Pape, has been published regularly since 1996 and has been recognized as one of the best personal finance periodicals in Canada. For membership details go towww.buildingwealth.ca/subscribe.

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