You remember Shopify (SHOP) , don't you? The red hot provider of software and services to business needing to establish and maintain an e-commerce presence. The stock was already interesting prior to the pandemic. Then, given the nature of its business, Shopify became an immediate pandemic darling for investors, trading from a low of roughly $305 in March of 2020 all the way up to an intraday peak just short of $1,763 on November 19th, 2021. That's a run of 478% over 20 months for those keeping score at home.
On Friday night, SHOP closed at $603.18, both down 65.8% from that November high and up 18.3% from the stock's March 2021 low. After trading as high as $780 since. Words that come to mind are "crazy" or "volatile." That said, at Friday's closing price, SHOP traded at 186 times (12 month) forward looking earnings.
And there is news. Early on Monday morning, Shopify announced a number of proposed updates to its corporate governance structure as well as a stock split. The firm will seek shareholder approval for these proposed changes at a special shareholder meeting set for June 7th.
The Nitty Gritty
Shopify has two classes of stock. The Class A shares (SHOP) that you all know and follow that have one vote per share... and the Class B shares that have 10 votes per share. Currently, the Class B shares have a controlling position equivalent to a rough 51% of Shopify's electorate. Under current structure, Class B shares automatically convert to Class A shares should the proportion of "super" voting Class B shares fall below 5% of total shares outstanding. Currently, Class B shares make up about 9.5% of all shares outstanding.
Under the proposed changes, existing Class A and Class B shares will remain outstanding and their terms will not be amended. Should these proposed changes pass, co-founding CEO Tobias Lutke and his affiliates would agree not to transfer existing Class B shares without Lutke retaining voting control over the shares. This would prevent an intergenerational transfer of power. A new "founder' share will be created for Lutke that combined with his existing Class B shares will increase his control over voting up to 40% from 34%. Lutke keeps the founder share for as long as he remains at Shopify as an executive, board member or consultant.
In addition, the firm also proposes a 10 for 1 stock split of the firm's Class A and Class B shares. If passed, shareholders will receive nine additional shares for every one share (A or B) already in possession after the close of business on June 28th. As mentioned, the firm will look for shareholder approval on June 7th. A two-thirds majority vote of all shares cast will be required to pass the proposal, while separately a simple majority of all votes cast for each class of stock individually will also be necessary, excluding votes controlled by Lutke.
Fundamentally...
Shopify is expected to report the firm's first quarter financial performance in mid-May. Expectations are all over the map for these guys, so it's very difficult to get a handle of where they are going. I see expectations for GAAP EPS at anywhere from a loss of $0.56 to a loss of $0.39, with adjusted results expected to print anywhere from $0.76 to $1.01. The adjusted comp for Q1 2021 is $2.01. I see expectations for revenue generation as low as $1.24B and as high as $1.57B. The comp there would be $988.7B. Year over year revenue growth that year ago ran up 110%.
The pace of the firm's y/y sales growth acceleration dropped over the subsequent three quarters to 57%, 46% and 41% in order. At the low end of the range... $1.24B, growth would decelerate further to 25.4%. The firm needs to generate revenue of $1.394B or greater in order to crack the trend of slowing acceleration for revenue generation.
As of the last reporting period, which ended on December 31st, Shopify, even with declining sales growth, was indeed supported by improving operating cash flow, leading to free cash flow of $1.86 per share. The firm had an almost stunning net cash balance of $7.789.6B when short-term investments are included (which I do). This brought current assets up to $8.539.3B. Current liabilities? $702.7M. I'm not kidding.
The firm's current ratio at the end of year was an incredible 12.15. "Healthy" doesn't even begin to describe this balance sheet. Total assets of $13.340.2B just dwarf total liabilities of $2.206.8B. The firm does not abuse the use of "goodwill" or other intangibles in order to beef up total assets. Total debt amounted to $911M, which the firm could pay out of pocket and still support an awesome current ratio. To say that SHOP passes the Sarge test does this balance sheet an injustice. The firm is obviously well managed. Additionally, tangible book value worked (on Dec 31) out to $84.45 per share.
My Thoughts
This one is difficult. I love the fundamentals that support the business. I hate the valuation. I wonder why the proposals are being made. It feels to me from afar, and I do not know if I am correct (but I am considering the stock for a trade/investment and this is my homework) that for some reason, the current CEO's power is being institutionalized and the shareholders are being noticed with a stock split to vote in favor of the changes. The firm talks about the affordability of the shares and said that this stock split is intended to make share ownership more accessible to all investors. I can't help but wonder if that is the reason, then where was this sentiment six months ago when the shares traded above $1,700. This really puts some hesitation in my trigger finger.
After trading higher ahead of the opening bell in New York, the shares are trading slightly above as well as below "unchanged" shortly after that bell has rung. I have to say that I need to see Q1 earnings and hear the firm's conference call, which will come ahead of the June 7th vote. I just don't trust the reason(s) why. Apparently neither does Wall Street. At least that's the knee jerk.
The stock is trading around $600. Incredibly May 20th $400 puts, which expire after earnings, can still be sold for about $7. That might be the play. I would cover it when I have a profit though. I would not let that one sit. This stock can and could do anything over five of six weeks.
