Debt vs. Dilution: Should Shopify Inc. Take On Debt?

Shopify Inc. (TSX:SHOP)(NYSE:SHOP) is in no rush to issue debt, choosing instead to issue additional shares at ever-increasing stock price levels. I’m going to look at the conditions that make sense for Shopify to lever up.

| More on:
The Motley Fool

For many investors who have piled in to Shopify Inc. (TSX:SHOP)(NYSE:SHOP) stock at higher and higher levels, dilution hasn’t seemed to be a concern. The company’s share price has risen on a torrid pace, increasing by more than 125% year to date on growth prospects that are rarely seen in financial markets today.

Shopify’s growth prospects have largely been fueled by equity issuances. The company recently completed an equity issuance last month, announcing an over-allotment purchase by the underwriters of the May 24 offering of 825,000 shares over and above the initial 5.5 million shares agreed to be sold under the offering. The shares were sold at an average price of US$91 per share, bringing the total aggregate proceeds of the transaction to US$575,575,000.

With underwriters clearly cashing in on this transaction (as the current share price is now hovering above US$97.50 per share), investors who are getting in at current levels are seeing their piece of the future earnings “pie” slowly become smaller.

Shopify’s strategy of using equity issuances to raise money instead of taking on debt is not uncommon in the tech industry. While Shopify may be in a position to receive relatively favourable terms (length and rate) on debt, the company has chosen to forego levering up, maintaining a nil debt balance.

One of the reasons many companies choose to take on debt are for the associated tax shields accompanying the debt position. As a company’s earnings continue to increase, reducing the business’s net income through interest expenses is one way it can lower its overall effective tax rate. As Shopify is currently not generating earnings, building a debt load to provide tax shields for earnings down the road may not make sense just yet.

The company’s equity valuation is also increasing at a faster rate than its dilution rate, meaning shares continue to rise, even though additional shares are being added — a sign that additional equity issuances may be coming down the road as Shopify continues its aggressive expansion plans.

Shopify’s merchant e-commerce platform has done amazingly well over the past few quarters with quarterly revenue growing at a rate of 75% year over year. With its partnership with industry juggernaut Amazon.com, Inc. (NASDAQ:AMZN) helping to propel Shopify’s platform towards becoming the default merchant services platform on the market, these recent equity issuances make sense in the grand scheme of things.

Bottom line

Shopify’s business model is one which will rely on additional capital moving forward as the business works towards its longer-term goal of becoming profitable. While debt may not be in the works in the near term, investors can rest assured that the debt option remains a powerful lever the company can use down the road if needed.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Amazon, Shopify, and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

More on Tech Stocks

think thought consider
Tech Stocks

Is CGI Stock a Buy Even With No Dividend Yield?

CGI stock may not have a dividend to speak of. But does that necessarily mean you should ignore this top…

Read more »

A robotic hand interacting with a visual AI touchscreen display.
Tech Stocks

Why Now Is the Time to Invest in Canadian AI Stocks

Are you looking for one of the most solid Canadian AI stocks out there? This one is probably your best…

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

Why AI Stocks Should Be in Every Canadian Investor’s Portfolio

AI stocks continue to be one of the best options out there for long-term investing, especially when considering Canadian options.

Read more »

money goes up and down in balance
Tech Stocks

1 “Magnificent 7” Stock I’d Buy Over Nvidia Right Now

Here's why Meta Platforms stock is a better choice for Canadian investors compared to Nvidia in November 2024.

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

3 No-Brainer Data Centre Stocks to Buy With $500 Right Now

Data centres are going to be a huge growth opportunity in the next decade. And these are the top buys.

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

OpenText stock has fallen in the last few years, but that could mean this top tech stock remains an undervalued…

Read more »

AI microchip
Tech Stocks

Celestica Stock: Buy, Sell, or Hold?

Celestica's stock price has rallied 950% in the last five years. Will the AI boom send it even higher in…

Read more »

data analyze research
Tech Stocks

2 Ridiculously Cheap Growth Stocks to Buy Hand Over Fist in 2024

Well Health Technologies is a cheap growth stock to buy for its record-breaking results, massive revenue growth, and profitability.

Read more »