Shopify Inc. surged past Royal Bank of Canada to become the largest publicly traded Canadian company after another impressive rally on Wednesday. But can the Ottawa-based retail software giant break the curse of predecessors that have risen to the top of the Toronto Stock Exchange only to nosedive soon after?
It may be hard to envision any slip-ups right now: The shares have surged more than 4,100 per cent since the company’s initial public offering in 2015, making the stock a spectacular success story.
Shopify’s market capitalization – or the value of its outstanding shares – is now an astounding $121.2-billion after Wednesday’s 6.9-per-cent gain in late afternoon trading. That’s ahead of the $120.5-billion market cap for RBC, whose share price is languishing at 2016 levels.
Shopify tops RBC as Canada’s most valuable company
Market watchers have seen hot stocks overtake RBC before, though, and it hasn’t ended well.
Indeed, stocks that have pushed the financial giant from the top of the S&P/TSX Composite Index over the past 20 years have not only failed to hold onto the top spot for long, they’ve performed miserably soon after.
The list of usurpers is an impressive display of blow-ups: Nortel Networks Inc., Barrick Gold Corp., Potash Corp. of Saskatchewan Inc. (now Nutrien Ltd.), Research In Motion Ltd. (now BlackBerry Ltd.) and Valeant Pharmaceuticals International Inc. (now Bausch Health Cos. Inc.) all topped RBC only to fall back sharply soon after – and, in Nortel’s case, fade out completely.
Shopify shares a few key similarities with these supernovas.
One, Shopify is in the right place at the right time, helping merchants sell their products online when demand for online offerings among small and medium-sized businesses is soaring because of closed physical stores and a locked-down economy. The company has little meaningful competition right now for its all-in-one services.
But Research In Motion was pretty much the only company selling mobile e-mail devices prior to the iPhone, making the stock look like a sure thing at the time. Barrick Gold and Potash Corp. soared with intense demand (and soaring prices) for their underlying commodities until prices for gold and fertilizer reversed.
Two, Shopify’s share price is supported by a sky-high valuation.
Shopify’s share price is 48 times its per-share reported sales, according to Bloomberg. That compares with a price-to-sales ratio of just 1.8 for RBC. Even compared with successful U.S. tech stocks, Shopify’s valuation is off the charts: Facebook Inc.’s price-to-sales ratio is 8.2 and Amazon.com Inc.’s ratio is 3.9.
What’s more, Shopify isn’t producing a profit. In its first-quarter financial results, released on Wednesday, Shopify reported a net loss of US$31.4-million. Even using the company’s own “adjusted operating” results, Shopify reported a loss of US$7.3-million.
Three, Shopify’s share price, which has nearly doubled since the start of 2020, is benefiting from remarkable momentum that resembles previous high-flyers.
Valeant’s share price rose 97 per cent in the first seven months of 2015, edging past RBC as Canada’s most valuable company in July of that year. Research In Motion’s share price surged nearly 150 per cent in the first 10 months of 2007 during its climb to the top.
Their share prices bolted into the stratosphere as investors clamoured for winners, but prices fell just as quickly as investors fled.
To be fair, Shopify has many things going for it. Early on, it identified an underserved e-commerce niche serving small and medium-sized businesses that wanted to move online. And the company hasn’t stood still: It has expanded globally and added services including packaging, fulfilment centres and an advertising app.
A number of metrics point to impressive growth. First quarter revenue increased 47 per cent, year-over-year, to US$470-million. Total sales made by merchants using its software increased 46.6 per cent to US$17.4-billion – underscoring that the company’s success is real and not driven by volatile commodity prices (like Potash Corp. and Barrick) or a questionable acquisition strategy (Valeant).
Canadians might want to celebrate the fact that the country has produced a global superstar that reflects its entrepreneurial spirit and technological know-how. But investors should approach Shopify’s drive to the top of the TSX with caution.
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David Berman