If you've been long Shopify, (SHOP) congratulations; the 167% return this year has been monumental and has dramatically outdone the S&P's 16% return.
All rocket ships eventually must align with reality, though, and the old maxim "a good company isn't always a good investment" keeps coming to mind at these valuations.
First, the good: Shopify's roughly 81% CAGR since its IPO has substantially outperformed the likes of Amazon's (AMZN) 47% and the S&P's 10% during the same period. Its 48% revenue growth continues to impress and outpaces Amazon's as well.
It's also extracting more value from its customers, increasing its average monthly revenues per user from $70 to over $110 over the last three years.
So why not dive head first into a long position?
While that revenue growth is robust, it's on the decline. Raw revenue resembles the up-and-to-the-right chart that's been Shopify's share price, while the rate of that growth injects some reality into the picture.
And while Shopify's recent revenue growth is better than Amazon's (~20%) or Ebay's (EBAY) (~2%), you are paying handsomely for it. Shopify's price-to-sales ratio of 32 is 10x that of Amazon's and Ebay's P/S ratio of 3. That means you are paying 10x more for a dollar of Shopify's earnings than you are for a dollar of Amazon's.
With respect to Shopify's business, its merchant services has risen to over 55% of its revenue, a trend that looks like it will continue. But this business' lower margins compared to the subscription component will continue to dilute gross margins that are already a little below the aforementioned peers; Amazon's 60% and eBay's 77% come in higher than Shopify's 55%.
And lastly, but certainly not least significantly, Shopify's operating losses continue to widen as operating costs have grown at a faster rate than have gross profits. Shopify's operating losses were only $15 million in all of 2015, but grew to $92 million for 2018. Shopify expects GAAP operating losses in the range of $145 million to $155 million for full-year 2019.
There is an overall positive story here, and I'm certainly not arguing for a bear case similar to the likes of famed short seller Citron Research's claim that Shopify will trade at $100 over the next 12 months (it closed Friday at $369.95). But unbridled bullishness never ends well, and Shopify trades like a company that must continue to grow at a rapid clip and is expected to improve its operating losses in the process.
I would never have the gall to short a company that feels like it makes fresh highs each week; if you feel particularly negative on the Shopify story, long puts would be a much safer way to bet on a downside move. The recommendation here: stay on the sidelines and wait for a valuation that's a bit less exuberant.
The author has no positions in any of the stocks mentioned