Skip to content

Shopify starts strong

Normally we don’t cover recent IPOs (initial public offerings) since they tend to be volatile and risky in their first few months of trading. However, last week a Canadian success story launched a successful IPO and gained over 50% on the opening day of trading. It was a very strong debut.

Glenn Rogers - Shopify Starts StrongBy Glenn Rogers, Contributing Editor

The company is called Shopify Inc. It trades under the symbols SHOP on the New York Stock Exchange and SH on the TSX. The IPO raised approximately $150 million at $17 a share, thereby valuing the company at about $1.2 billion (figures in U.S. dollars.). Canada can be justly proud of how this young company has grown since it first started doing business in 2004.

Shopify is based in Ottawa and is led by a young founder and CEO who goes by the name Tobi (actually Tobias Lutke). Originally, he only wanted to sell snowboards on line but when he discovered he couldn’t find a software program that would work with his e-commerce plans he decided to create his own.

Since those humble beginnings; Shopify has grown exponentially. It now employs over 500 people, some of whom work from their own homes, and does business in 150 counties. Some of its clients include Tesla Motors, Google, Budweiser, and Wikipedia.

I first became aware of the company through another business I’ve invested in that is based in Portland, Oregon called Poler (www.polerstuff.com). No, that’s not a typo – often the name is confused with the fitness brand spelled Polar. But if you visit the website you will see that this company is very different, specializing in eyewear.

The point is, the website is powered by Shopify. By powered I mean that Shopify provides the backend software that enables the shopping experience. One of our technical people has a very high designation as a Shopify technician and I was able to ask him a number of questions about the platform and what the competition might be like. He assured me that Shopify is the technology leader and there is currently no better platform available for people who want to run an e-commerce site.

E-commerce – powered by Shopify

That might lead you to ask how many people want to run a powerful e-commerce site – in other words how big is this market? Turns out it’s huge! Currently over 165,000 online stores use Shopify and over $8 billion worth of transactions have been processed through the company’s platform. E-commerce is growing rapidly globally and that is unlikely to change any time soon. This growth has enabled Shopify to double its revenue in each of the last two years and the company expects to reach sales of $150 million this year. Shopify is not yet profitable and lost $22.3 million last year compared with a $4.8 million loss in 2013 but the company is investing heavily to stay ahead of the smaller competitors and keep up with some of the larger ones like eBay.

The company’s revenue comes from annual subscription fees billed monthly, which averaged $1,000 per merchant last year. Once a customer commits to Shopify it’s very difficult to change providers since all the site revenue flows through its platform and that’s a risky thing to mess with if you are the CEO of any business. So it’s likely that, once on the platform, clients will stay put. This means recurring revenue should be solid.

The big question is what happens next. The stock price closed at US$25.68 (C$31.25) on the first day of trading and has been as high as US$31.10. But it pulled back last week, closing on Friday at C$33.52, US$27.20. That’s down 12.5% from the high. Taking a longer-term view, will Shopify continue to grow and thrive or will it be the next Nortel or Blackberry? Only time will tell, although I have to say I really like the business model. I think this is the real deal.

For now, give the stock some time to settle down. As I said at the outset, IPOs have a history of volatility. Etsy Inc. (NDQ: ETSY), an international on-line store with many unique products, took off after its launch in April and traded as high as US$35.74, only to crash back to earth after the first-quarter report came out. It closed on Friday at US$16.76, just slightly above the IPO price of $16.

The same thing happened to high-profile Alibaba (NYSE: BABA). Its stock dropped sharply after last October’s IPO, rallied to US$120 a month later, then fell again to US$77.77 in early May. Alibaba is now coming back, finishing Friday at US$89.32, and is one of my largest holdings but it was rough on investors who jumped in too soon.

The message is: be wary. Shopify is off to a great start but it’s early days.

Action now: Monitor. If you feel you must buy in now, start by taking a small position and average in after the first quarterly report.




Shares