Shopify, which trades on the Toronto – its Toronto office seen here on Feb. 12, 2020 – and New York stock exchanges, has raised US$4.1-billion over seven financings, including an overnight 'block trade' on May 7-8 that netted US$1.46-billion.Chris Donovan/The Globe and Mail
Shopify Inc. looks like a Silicon Valley heavyweight and raises money like a Wall Street champion. But on Bay Street, Canada’s most valuable company isn’t quite a hometown hero.
Despite its growing scale – with a market capitalization of US$91-billion, the Ottawa-based provider of online software to retailers is worth more than Starbucks Corp., Boeing Co. and Citigroup Inc. – Shopify is undercovered by Bay Street analysts, underweighted by Canadian fund managers and, some observers say, underappreciated by domestic equity strategists. It also does most of its underwriting on Wall Street, with Canadian dealers relegated to the backseat.
Shopify, which trades on the Toronto and New York stock exchanges, has raised US$4.1-billion over seven financings, including an overnight “block trade” on May 7-8 that netted US$1.46-billion. On six of the deals, including its May, 2015, initial public offering, Morgan Stanley and Credit Suisse were lead bankers, placing most shares with U.S. clients. (Citigroup displaced Morgan Stanley in the most recent deal.)
Meanwhile, Canaccord Genuity, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada have each been in one or two deals, but only as minor players, earning 9 per cent of the US$86.8-million in underwriting commissions and discounts paid to date. Only National among them has been in the past four deals (and just two of them), selling 5.4 per cent of the total shares.
That has rankled some. When Shopify announced the two U.S. banks as co-leads on the latest financing, Mark McQueen, president of innovation banking with CIBC, tweeted a picture of a plaque commemorating Research in Motion Ltd.’s US$945-million stock sale in January, 2004, which was led by Wall Street banks, but included nine Bay Street underwriters. “They knew that was how you supported the local ecosystem," he tweeted. "Sad for [Canada] tonight.”
Mr. McQueen declined to comment other than to tell The Globe and Mail that he has been an investor since the IPO and has “nothing but respect and admiration for what the team has accomplished.” While his tweet didn’t name Shopify, it touched a nerve.
Two senior Bay Street sources said Shopify is a frustrating company for Canadian dealers because it uses so few investment banks to raise money – and almost none in Canada – unlike other Canadian issuers. The Globe granted them confidentiality because they are not authorized to speak on the issue.
Shopify is “not out to make a bunch of friends among the banks," said Katie Keita, Shopify’s senior director of investor relations. “We really do want to get back to work. There’s not a ton of time for steak dinners … with bankers.”
If anything, Shopify has treated financing as a process to get through expediently. Its past four financings were “block trades,” where underwriters bought the entire offering, taking on the risk and effort of reselling shares.
In Canada, such fundings, called bought deals, often bring together many underwriters, who typically charge 4 per cent of proceeds. In the much larger U.S. market, Wall Street banks bid on the full deal, taking a lower cut. Shopify has paid 0.96 per cent to 1.86 per cent on its block trades.
THE SHOPIFY EFFECT
After the downfall of BlackBerry, Canada’s technology
sector was a marginal part of the TSX Composite Index
for years, dominated by companies like Constellation
Software and Open Text that generated most of their
growth from mergers and acquisitions. That has
changed markedly since Shopify was added to the
TSX’s information technology index in 2017. The IT
index has widely outperformed the composite index
since then and the sector now accounts for close to 10
per cent of the overall index, ahead of communications
services and utilities.
Seven key Shopify moments vs. the TSX
and the technology sector
S&P/TSX Capped Information Technology Index
S&P/TSX Composite Index
2
2
0
%
2
0
0
1
8
0
1
6
0
1
4
0
1
2
0
1
0
0
8
0
6
0
4
0
2
0
0
-
2
0
-
4
0
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
May 20,
2015:
Shopify
goes
public,
closing
at US$17
Jan. 19,
2017:
Stock closes
above
US$50
Aug. 1, 2017:
Stock surpa-
sses US$100
for first time
March 11, 2019:
Shopify stock
hits US$200, and
adds another
50%+ in next
three months
Aug. 27, 2019:
Surges past US$400 mark
to close at US$406.99
March 16, 2020:
As economies
shut down, stock price falls to US$322.29, down 37% from 12
days earlier
May 6, 2020: Stock shoots past US$700
as e-commerce sales spike
Shopify vs. the next nine most valuable public
Canadian tech companies – combined
Market cap all classes, as of Friday (C$ billions)
$129.3-billion: Shopify
$83.4-billion
$30.9: Constellation
Software
$22: CGI
$14.6: Open Text
$5.2: Descartes Systems
$4.5: Kinaxis
$3.5: BlackBerry
$3.1: Enghouse Systems
$2.1: Lightspeed POS
$0.99: Celestica
Shopify’s growing share of S&P/TSX
Capped Information Technology Index
June 19, 2017
11.4%
Dec. 31, 2018
22.2%
Dec. 31, 2019
39.4%
Thursday
58.7%
sean silcoff and JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: capital iq; tmx group; S&P Dow Jones Indices
THE SHOPIFY EFFECT
After the downfall of BlackBerry, Canada’s technology
sector was a marginal part of the TSX Composite Index
for years, dominated by companies like Constellation
Software and Open Text that generated most of their
growth from mergers and acquisitions. That has
changed markedly since Shopify was added to the
TSX’s information technology index in 2017. The IT
index has widely outperformed the composite index
since then and the sector now accounts for close to 10
per cent of the overall index, ahead of communications
services and utilities.
Seven key Shopify moments vs. the TSX
and the technology sector
S&P/TSX Capped Information Technology Index
S&P/TSX Composite Index
2
2
0
%
2
0
0
1
8
0
1
6
0
1
4
0
1
2
0
1
0
0
8
0
6
0
4
0
2
0
0
-
2
0
-
4
0
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
May 20,
2015:
Shopify
goes
public,
closing
at US$17
Jan. 19,
2017:
Stock closes
above
US$50
Aug. 1, 2017:
Stock surpa-
sses US$100
for first time
March 11, 2019:
Shopify stock
hits US$200, and
adds another
50%+ in next
three months
Aug. 27, 2019:
Surges past US$400 mark
to close at US$406.99
March 16, 2020:
As economies
shut down, stock price falls to US$322.29, down 37% from 12
days earlier
May 6, 2020: Stock shoots past US$700
as e-commerce sales spike
Shopify vs. the next nine most valuable public
Canadian tech companies – combined
Market cap all classes, as of Friday (C$ billions)
$129.3-billion: Shopify
$83.4-billion
$30.9: Constellation
Software
$22: CGI
$14.6: Open Text
$5.2: Descartes Systems
$4.5: Kinaxis
$3.5: BlackBerry
$3.1: Enghouse Systems
$2.1: Lightspeed POS
$0.99: Celestica
Shopify’s growing share of S&P/TSX
Capped Information Technology Index
June 19, 2017
11.4%
Dec. 31, 2018
22.2%
Dec. 31, 2019
39.4%
Thursday
58.7%
sean silcoff and JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: capital iq; tmx group; S&P Dow Jones Indices
THE SHOPIFY EFFECT
After the downfall of BlackBerry, Canada’s technology sector was a marginal part of the
TSX Composite Index for years, dominated by companies like Constellation Software and
Open Text that generated most of their growth from mergers and acquisitions. That has
changed markedly since Shopify was added to the TSX’s information technology index in
2017. The IT index has widely outperformed the composite index since then and the
sector now accounts for close to 10 per cent of the overall index, ahead of communica-
tions services and utilities.
Seven key Shopify moments vs. the TSX and the technology sector
S&P/TSX Capped Information Technology Index
S&P/TSX Composite Index
2
2
0
%
2
0
0
1
8
0
1
6
0
1
4
0
1
2
0
1
0
0
8
0
6
0
4
0
2
0
0
-
2
0
-
4
0
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
May 20,
2015:
Shopify
goes
public,
closing
at US$17
Jan. 19,
2017:
Stock closes
above
US$50
Aug. 1, 2017:
Stock surpa-
sses US$100
for first time
March 11, 2019:
Shopify stock
hits US$200,
and adds
another 50%+
in next
three months
Aug. 27, 2019:
Surges past US$400 mark
to close at US$406.99
March 16, 2020:
As economies
shut down, stock price falls to US$322.29, down 37% from 12
days earlier
May 6, 2020: Stock shoots past US$700
as e-commerce sales spike
Shopify vs. the next nine most valuable public
Canadian tech companies – combined
Shopify’s growing share of S&P/TSX
Capped Information Technology Index
Market cap all classes, as of Friday (C$ billions)
June 19, 2017
$129.3-billion: Shopify
11.4%
$83.4-billion
Dec. 31, 2018
$30.9: Constellation
Software
22.2%
$22: CGI
Dec. 31, 2019
$14.6: Open Text
$5.2: Descartes Systems
39.4%
$4.5: Kinaxis
$3.5: BlackBerry
Thursday
$3.1: Enghouse Systems
58.7%
$2.1: Lightspeed POS
$0.99: Celestica
sean silcoff and JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: capital iq; tmx group; S&P Dow Jones Indices
“If you have banks that can come to you and cover what you want to place, why would you not go with them?" Ms. Keita said. “You want to minimize the discount, maximize the dollars to you." As for why National, which got a 2.4-per-cent allotment of recent deal, was included, Ms. Keita said it was “helpful” that managing director Colin Ryan worked on the IPO when he was with Credit Suisse. “National provides value to Shopify.”
The limited fees for Bay Street might help explain why just three of the Big Six banks’ research departments cover the stock – all six follow much smaller tech companies. "It doesn’t make any sense to me why they wouldn’t cover it,” said Gus Papageorgiou, an analyst with PI Financial. "It’s the biggest stock on the index and by far [Canada’s] most important tech stock.”
Since it was added to the elite S&P/TSX 60 index in March, 2019, large funds have consistently owned less Shopify stock than its weighting on the index, according to National Bank Financial data.
The top 40 Canadian fund managers had 0.5 per cent of assets in Shopify stock last May and November, when Shopify represented 1.9 per cent and 2.3 per cent, respectively, of the index. On April 30, Shopify stock amounted to 1.5 per cent of their holdings – more than four percentage points below its index share. No other stock is nearly as underweighted.
Several Canadian fund managers have stated they like Shopify but find the stock too pricey at around 45 times this year’s forecast revenue, given it loses money and generates no operating cash flows. When it passed Royal Bank as Canada’s most valuable company, some spoke of the “curse” that has befallen past names that hit that level.
“Companies that surpassed [Royal] failed for various different reasons, but why they succeeded was always the result of excessive investor optimism and overvaluation," Bob Swanson, principal and portfolio manager Cambridge Global Asset Management, wrote in a blog on May 8. “There is nothing to suggest that Shopify can’t sustain its market cap leadership, but history might suggest otherwise.”
Several sell-side analysts rate the company a “buy” with target prices over US$800 a share, above where it closed Friday.
Richard Liley, an equity analyst with Leith Wheeler, which doesn’t own the stock, said “to own Shopify now means you think the market is underestimating [its] potential growth and eventual profitability. Given the valuation … it is very difficult to believe that."
Not everyone agrees. Justin Anderson, an analyst with Mawer Investment Management, the lone top-40 Canadian fund manager to overweight Shopify, sees five to 30 times revenue growth ahead for Shopify thanks to accelerating adoption of e-commerce, expansion into new territories and categories, such as groceries, and its growing business serving larger merchants.
“The valuation does look very expensive, at least on traditional metrics," he said on a Mawer podcast last week. "And so, you need to be able to really understand and quantify what that upside looks like.”
Ms. Keita acknowledged Shopify’s stock price “has always been pretty high,” adding Canadian investors have “a different mindset relative to U.S. investors. It’s valuation-sensitive, it’s more risk averse, more discerning. You have a very hard asset kind of economy that I think permeates culturally. U.S. investors are more prone to asking for timelines around revenue as opposed to bottom line questions" that dominate Canadian concerns.
“What bothers me is when [they] look at a company and reject them straight up out of hand because they’re not profitable, without thinking a bit more deeply about why they’re not profitable,” which in Shopify’s case is because it is investing heavily in its business, she said.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.
Sean Silcoff