Ruth Saldanha: You may have heard about the curse of Canada. Any company that fired a Canadian bank to become Canada’s largest company in terms of market cap would have had a big rough patch soon. Some of the cursed names include Nortel, BlackBerry, Potash, and Valeant Pharma. So, investors were scared when Shopify hijacked RBC in May 2020 to take the top spot, and this year, Shopify seems to have been hit by volatility. So, is this the curse at work? Morningstar Senior Equity Analyst, Dan Romanoff, covers the stock, and he’s here today to tell us what he thinks.
Dan, thank you so much for coming today.
Dan Romanoff: Thank you for accepting me.
Saldanha: So, is Shopify cursed?
Romanoff: Well, you know, were the Toronto Maple Leafs cursed when they didn’t win the Stanley Cup in a while because they weren’t retiring jerseys? I must say, I live in Chicago, so Cubs fans thought we had the curse of Billy Goat, and it took 100 years to win a World Series. So, damn it? I think anything is possible.
Hopefully Shopify won’t be damned because I’m not sure how I can write that in a research note and get it through compliance. So, I’ll go with no, maybe they’re not cursed. And interestingly some of the names you mentioned, Nortel and Potash, and like, they had real problems. BlackBerry had real problems, and that was Apple came along really at that time with the iPhone. So, there are real issues going on there. And with Shopify here, that’s not happening. Like all US software it has weakly dropped 30% in the past few months since it came to prominence in November. Shopify dropped by about 30% as well in the same timeframe. So, it’s usually on the line. And honestly, I would assume that Shopify would suffer a bit of a worse fate today, just because it has one of – it trades in one of the highest multiples within the software group here. So, I was a bit surprised at how strong it was against the group really.
Saldanha: So, in your opinion, what led to this particular correction? Is this widely expected and, for investors not on Shopify, is it a buying opportunity?
Romanoff: So, is this to be expected? I mean, definitely, it’s widely held. So, I think a lot of investors kind of loosely expect a correction. And we’ve all seen headlines about inflation, about new variants of Covid-19, rising interest rates. So, we see those headlines. You see this massive rotation from growth stocks to stocks of value. I thought in almost all of 2020 – well, in the last half of 2020, most of 2021 that software will be kind of at least somewhat appreciated, if not overvalued, in a lot of places. And now the pendulum is pretty much back the other way to the point where you have some chance to buy.
So, if you look at Shopify, we actually have a $ 862 fair value estimate in US dollars. I think that’s about $ 1,070 Canadian dollars. So, actually still a bit overvalued according to us. And one of the reasons why I say that, and I need to have this discussion with investors when they want to talk is, to support some of it, like, higher stock prices, if you come back just at what the stock price indicates. and you look at what kind of revenue growth you’re talking about 20 years from now and you see like 20% or 25% revenue growth to support these stock prices, which is really hard to do. And you’re talking about 25 or 30 years after the company was founded, and the revenue-just dollar amounts at that point are really starting to take over. So, that’s why we have a lower fair value here than where it trades. So, of course, I don’t recommend buying it here. That being said, I think this is a great company. I think they have a great product. Their portfolio is right where it needs to be to serve the SMB and the mid-market. Developing out of third-party logistics, a whole solution there, I think is a great step in a strategic way. So, many will like it. You usually have to be comfortable with appreciation, and that’s not something I can do.
Saldanha: So, what should investors who currently own Shopify do?
Romanoff: Well, some of the high flying, kind of high volatility names like early in the pandemic as they quickly rise, I immediately told some of the other remote work tools, Zoom, DocuSign, some in lifestyle names, such as remote living Names like Shopify, are quickly appreciated in my opinion. So, when I was writing even a year-and-a-half ago these things were trading at levels of appreciation that were deliberately unsustainable. And fast forward to now and you’ll see this big sell-off and you’ll see names like Zoom and DocuSign, not specifically that you’re asking about those, but they’re in the same group, they’re in the 50’s % or maybe less, and Shopify dropped by 30%. So, they are great companies and certainly there is a use case for solutions, but at the same time, it is difficult to support appreciation.
So, in the case of Shopify, if I were a Shopify investor, I still would be – I’ll cut it because that is – I can’t support appreciation, and I think at this point, you can get some of what you want ko. think are really blue chip, really high quality good names, such as for example, Salesforce or Adobe or ServiceNow, which have been hit hard, along with other software.
But in the particular case of Adobe and Salesforce, these companies reported that, they reported a quarter at the end of November in the case of Salesforce; Adobe reported in mid -December. So, you, pretty much, already know what’s going on inside. You have seen the guide. So, they have been de-risked in my opinion only on a tactical basis. So, actually, that’s where I’ll go first.
Saldanha: Thank you so much for coming here and sharing your thoughts, Dan.
Romanoff: All right, no problem.
Saldanha: For Morningstar, I’m Ruth Saldanha.
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