Shopify Inc. enjoyed a long stretch at the top of the S&P/TSX Composite Index, but its status as Canada’s most valuable company has ended. Royal Bank of Canada , the long-term champion, is comfortably back on top of the benchmark – and perhaps investors should cheer the news.
While a company’s ranking in an equity index might look trivial to a serious investor, the comings and goings of Canada’s top companies over the past two decades have provided fodder for a fascinating pattern: Any company that has usurped RBC, in terms of market capitalization, has hit a rough patch soon after.
Nortel Networks Inc., a technology darling in the late 1990s, crashed with the technology bubble. Research In Motion Ltd. (now BlackBerry Ltd.) soared to the top when BlackBerry was the best wireless communications device, but faded as the iPhone gained traction. Barrick Gold Corp. lost its lustre when last decade’s gold mania subsided.
It goes on: Potash Corp. of Saskatchewan Inc. (now Nutrien Ltd. ), briefly at the top, declined with waning fertilizer prices. And Valeant Pharmaceuticals International Inc. (now Bausch Health Cos. Inc. ) soared on an aggressive consolidation streak, then crumpled under the weight of too many pricey acquisitions.
This is more than a quirky pattern relegated to the back pages of Canadian newspapers: The Financial Times took note of the “Canadian curse” in May, 2020, when Shopify cruised past RBC and held on for nearly 20 months.
With Shopify’s share price falling in recent weeks – it has declined 32 per cent from its recent high on Nov. 19, putting the company’s market capitalization $20-billion behind RBC on Friday – the Ottawa-based e-commerce company appears to have joined the list of has-beens.
Well, for now.
Shopify remains an exceptionally attractive international brand that is catering to the online ambitions of small and mid-sized businesses. Third-quarter revenue increased by 46 per cent, year-over-year, amid expectations of ongoing growth for years.
“Shopify exemplifies what an innovative commerce platform can achieve with product innovation and scale expansion in the high growth e-commerce swim lane,” Timothy Chiodo, an analyst at Credit Suisse , said in a July note that laid out a long-term growth case for the company through 2030.
As well, the stock’s decline coincides with a more general retreat from technology stocks – rather than any particular failure on Shopify’s part – as attention shifts to the prospect of higher interest rates, which can erode the value of future profits. Conversely, higher rates reward banks like RBC because lending become more profitable, which helps explain the bank stock’s recent strength.
Lastly, the long-term performance of Shopify’s share price makes the recent setback look like a blip. The price is up nearly 600 per cent over the past three years, and it is 25 per cent higher since the company soared to the top of the TSX in 2020. Long-term investors may have little to complain about.
Still, Shopify’s recent decline, which at Friday’s close relegates the company to third place (slightly behind Toronto-Dominion Bank ), fits a pattern. Like most previous stocks that have surrendered the title of Canada’s most valuable company, Shopify has been burdened by enormous investor expectations, reflected in a share price out of whack with reported financial results.
At its peak in November, the stock traded at more than 40 times analyst estimates for 2021 revenues. Based on 2021 profit estimates from CIBC World Markets, the stock’s price-to-earnings ratio then was over 280.
These extreme valuations may work when investors are fixated on strong growth prospects. However, a pricey stock can suffer when attention shifts to, say, slower growth or rising interest rates.
It’s little wonder, then, that RBC has always reclaimed the top spot on the TSX over the past two decades. While usurpers show promise, RBC delivers results: The bank reported net earnings of $16.1-billion in 2021, up 40 per cent from 2020, yet the stock’s P/E ratio is a reasonable 12.7. Reflecting its financial strength, the bank raised its dividend by 11 per cent in the fourth quarter.
It may not be the most exciting name in the TSX. But when RBC is Canada’s most valuable company, the Canadian benchmark looks a lot more sensible.
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