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.
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