Does Shopify (SHOP) make money?

Shopify (SHOP) is the stock of the hour. In 2020, Shopify’s share price rose from $407.81 on 2 January 2020 to $1,090.87 on 26 August 2020.

Mr. Market loves Shopify (NYSE: SHOP) because of a June deal between the Canadian e-commerce platform and Walmart (NYSE: WMT). TechCrunch claims Shopify brought 3,000 new sellers to Walmart’s small-business marketplace in June.

Moreover, Marketplace Pulse estimates over 5,000 new sellers have joined Walmart’s marketplace since 15 June 2020. Marketplace Pulse estimates over 15,000 new sellers joined the Walmart marketplace between January and June 2020. Hence, Marketplace Pulse claims the Walmart Marketplace added 1,400 new sellers a month in 2020, tripling the Walmart Marketplace’s seller number.

Is Shopify worth $1091 a share?

Shopify Inc. (NYSE: SHOP) is a platform that lets anybody create an online store. In 2020, Shopify’s growth has exploded.

For example, Shopify claims the number of new Shopify stores grew by 62% between 13 March and 24 March 2020, PYMNTS.com reports. However, you can attribute Shopify’s growth to such features as an extended 90-day free trial for standard plans, and allowing all Shopify Merchants to accept gift-card payments.

In addition, Shopify claims its year-to-year Gross Merchandise Volume grew by 45% in the six weeks ending on 13 March 2020. However, Shopify admits its GMV point-of-sale (POS) declined by 71% between 13 March and 24 April 2020.

Does Shopify Make Money?

Thus, Shopify is capable of massive growth and massive collapse, but does it make money?

Shopify makes small amounts of money. For example, Shopify reported a quarter operating income of $28,000 on 30 June 2020. However, that number grew from a -$73.23 million quarterly operating loss on 31 March 2020.

Impressively, Shopify’s quarterly revenues grew from $470 million on 31 March 2020 to $714.34 million on 30 June 2020. In contrast, Shopify’s quarterly gross profit grew from $256.95 million to $375.03 million in the same period.

Moreover, Shopfiy’s quarterly common net income grew from -$31.43 million in March 2020 to $36 million in June 2020. Thus, Shopify is reporting an income for the first time in five quarters. However, Shopify is making tiny amounts of money.

How Much Cash Does Shopify Generate?

I like Amazon (NASDAQ: AMZN) because the Everything Store generates enormous amounts of cash. Shopify, on the other hand, generates little cash.

For instance, Shopify reported a quarterly operating cash flow of $165.19 million on 30 June 2020. The operating cash flow rose from -$84.95 million on 31 March 2020 and $52.89 million on 31 December 2020.

Similarly to Amazon, Shopify borrows enormous amounts of money. For example, Shopify reported a quarterly financing cash flow of $1.479 billion on 30 June 2020. That number grew from $19.43 million on 31 March 2020. The financing cash flow represents money Shopify raises by selling debt or borrowing.

Shopify reported a quarterly ending cash flow of $913 million on 30 June 2020. The quarterly ending cash fell from $969.36 million on 31 March 2020 and rose from -$474.61 million on 31 December 2019.

Shopify (SHOP) has some similarities to Amazon

Shopify (SHOP) had $4 billion in cash and short-term investments on 30 June 2020. That number grew from $2.361 billion on 31 March 2020 and $2.455 billion on 31 January 2019. Thus, Shopify can accumulate substantial amounts of cash as Amazon does.

Dramatically, Amazon had $71.391 billion on 30 June 2020 up from $49.292 billion on 31 March 2020 and $55.021 billion on 31 December 2019. So, Shopify has some similarities to Amazon (AMZN).

I think investors are buying Shopify because it resembles Amazon. However, Shopify’s value is a fraction of Amazon’s. In particular, Shopify lacks Amazon’s enormous fulfillment infrastructure and Amazon Web Services.

Shopify Experiences incredible Revenue Growth

Shopify is experiencing dramatic revenue growth. In fact, Stockrow estimates Shopify’s revenues grew by 97.34% in the quarter ending on 30 June 2020.

Conversely, Shopify’s revenues grew by 46.65% in the previous quarter and 46.91% in the last quarter of 2020. Thus, Shopify offers the same breakneck growth that Amazon (NASDAQ: AMZN) reports.

In comparison, Stockrow credits Amazon with a 40.23% revenue growth rate for the quarter ending on 30 June 2020. Amazon’s revenue growth rate rose from 26.39% on 31 March 2020 and 20.80% on 31 December 2019. Those both Spotity and Amazon experience incredible growth in a pandemic.

I think the massive revenue growth is what attracts Mr. Market to Shopfiy. Shopify offers explosive growth in an e-commerce market supposedly dominated by Amazon (AMZN).

What Future will Shopify Have?

I think Shopify could have a bright future if it can add other major retailers to its platform.

Walmart (WMT); had over 50,000 sellers in its online marketplace in June 2020, TechCrunch claims.  Hence adding other retailers could expand Shopify’s sales and revenues.

I think there are many retailers that could benefit from a Shopify alliance. Those retailers include; Wayfair (NYSE: W), Overstock.com (NASDAQ: OSTK), BestBuy (BBY), The TJX Companies (NYSE: TJX), Macy’s (NYSE: M), Target (NYSE: TGT), Nordstrom (JWN), Apple (AAPL), Big Lots (BIG), Newegg, Kroger (NYSE: KR), Dollar Tree (DLTR), Walgreens (WBA), and Kohl’s (NYSE: KSS).

I think Shopify’s primary need is to partner with companies with fulfillment and distribution infrastructure. For example, retailers with enormous physical footprints such as Macy’s or Kroger. In addition, companies with strong physical customer service capabilities such as BestBuy could enhance Shopify.

BestBuy could service electronics sold through Shopify and handle returns, for example. One reason for such an alliance is to differentiate Shopify from Amazon. Another reason for a BestBuy or Nordstrom partnership is to attract higher income shoppers.

Does Shopify Need Fulfillment?

A strange partnership for Shopify that could enhance its capabilities is with mall operators such as the Simon Property Group (NYSE: SPG).

Simon (SPG) and Amazon are partnering to convert dead JP Penney stores into Amazon fulfillment centers. Moreover, Simon and Brookfield Property Partners (NASDAQ: BPY); another mall operator, are considering an acquisition of the bankrupt JC Penney.

Shopify could partner with Simon or Brookfield to convert empty malls or dead department stores into fulfillment centers, for instance. Or Shopify could join with Simon and Brookfield to buy JC Penney and develop a new brand to compete with Amazon.

One advantage to a Simon or Brookfield alliance is to give Shopify brick and mortar outlets for returns and pickup of merchandise. Another use is to sell discounted merchandise for customers who chose pickup.

A final option could be for a brick and mortar retailer to join Shopify, Simon, and Brookfield in a JC Penney bid. Possible partners for that bid include Walmart, BestBuy, Overstock.com, Macy’s, TJX, Kroger, and Kohl’s. TJX, in particular, converts old department stores into discount department stores.

Shopify is a Terrible Investment

I think Shopify (SHOP) is a terrible investment despite its bright future. Shopify is a horrible investment because Mr. Market astronomically overpriced its stock at $1,090.87 on 26 August 2020.

I think there is nothing in Shopify’s financial numbers that justifies the $1,021.12 price. I advise all investors to avoid Shopify because its stock is in a bubble that will collapse.

Conversely, I consider Shopify itself an excellent company that will survive and make enormous amounts of money. Watch Shopify, consider using it for ecommerce, but do not invest in Shopify.

You need to avoid Shopify because I predict its stock will collapse. I advise investors to wait until after the collapse to buy SHOP.

Originally published at https://marketmadhouse.com on August 26, 2020.