Last week, Shopify Inc (TSX:SHOP)(NYSE:SHOP) issued $440 million worth of shares to institutional investors for a price of $154 USD (approximately $209 CAD) each. The buyers included major financial institutions, meaning that the $154 USD price had significant analyst backing. Since the time the shares were issued, Shopify has dipped as low as $122 USD on the NYSE and $166 on the TSX–making them discounted relative to what many analysts considered a fair price.
Of course, analysts and fund managers can be wrong. But for non-expert investors, analyst target prices can be a great yardstick for pricing stocks. And with Shopify growing revenue at 58% year-over-year while the stock price falls, this may be a great time to buy the dip.
Why investors wanted in at $154
$154 is not a historically high price for Shopify shares. The stock’s 12-month high is $173 on the NYSE and $229 on the TSX. At these valuations, the company’s price/sales ratio would be less than 10, and its price-to-book ratio less than 2. As of this writing, Shopify traded at 5.92 times sales and 1.14 times book value, both fairly low figures for a fast-growing company.
On the earnings front, things aren’t quite as encouraging: as of its latest quarterly report, Shopify’s diluted EPS was $-0.64. However, net losses are quite common for early stage tech companies, and Shopify is only three years from its IPO. If it can continue growing its revenue at high double digits without burning through too much cash, it should eventually start to eke out positive earnings.
Dilution not that big of a concern
Whenever a company issues new shares, dilution every stockholder’s biggest fear. And, yes, Shopify is diluting equity here. However, based on the number of shares sold (2.6 million) vs. the number of shares outstanding (107 million), the dilution will only be by about 2.4%. So it’s not like Shopify shares are getting watered down to nothing, and if the $440 million raised is spent wisely, it could be well worth it.
Does Shopify need the money?
It’s fine and dandy to say that minor dilution isn’t a big deal. But if the money raised isn’t legitimately needed, it’s still an unwise move. In Shopify’s case, however, it appears that selling stock could be necessary.
Since its IPO, Shopify has consistently been running operating losses. A year ago, fellow fool Will Ashworth noted that Shopify was losing $1 for every $10 in revenue. Today, the picture is largely unchanged: in Q3 2018, the company ran an operating loss of $31 million, approximately 12% of revenue.
A company that loses money from operations needs to get financing somewhere else, and although Shopify already has a $1.6 billion cash horde, about $500 million of that is going toward a massive new office in Toronto. So, an extra $440 million in liquidity could be needed for the company to fund new growth initiatives.
Bottom line
Shopify’s $440 million stock sale was not made to retail investors, but to financial institutions, which means that the sale price of $154 USD/$209 CAD was considered fair by financial industry professionals. Couple the massive vote of confidence from analysts with the simple fact that Shopify is one of Canada’s fastest-growing companies and there’s a strong case to be made that this stock is undervalued.
