One Large-Cap Technology Stock to Hold- Shopify Inc.

Shopify Inc. (TSX: SHOP) offers an e-commerce platform primarily to small and midsize businesses and operates through two segments, namely subscription solutions and merchant solutions. 

Key Updates:

• Higher cash flows: The company reported a higher cash from operations of USD 504.4 million in FY21, as compared to the USD 424.9 million in FY20, supported by higher net profit. A higher cash flow indicates higher liquidity level and is a key positive.
  

• Strong balance sheet: In Q4FY21, the company reported a healthy debt to equity (D/E) ratio of 0.08x, which is significantly lower than the industry median of 0.51x. A lower debt to equity suggests higher financial flexibility of the firm. Moreover, the company has a lower balance sheet risk, as it’s long-term debt to total capital stood at 7.6%, which is considerably lower than the industry median of 25.6%.
  

• Launch of JD Marketplace sales channel: In Q4FY21, the company launched JD Marketplace sales channel with collaboration with JD.com. This is expected to unlock the world’s largest ecommerce market for the merchants by giving them access to one of China’s leading ecommerce marketplaces and supporting their cross-border commerce efforts. This new channel would provide an access to JD’s 550 million active customers in China.
  

Risks associated with the investment:

The company’s operations might be hindered due to the entry of new player within the industry with innovative product offerings along with advanced technology services. Moreover, the company is witnessing an increment in research and development expense in order to stay competitive in the industry, which might pose a challenge to the operating margin. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• SHOP announced its full-year results, wherein the company posted revenues of USD 4,611.8 million FY21, stood higher than USD 2,929.4 million in FY20. The surge was primarily due to higher income from both merchant solutions and subscription segments.
• The company reported a higher gross profit of USD 2,481.1 million in FY21, as compared to USD 1,541.5 million in FY20, supported by elevated revenue, partially offset by higher cost of revenue.
• The period was marked by higher sales & marketing expense, increase in Research & development costs, coupled with higher general & administrative expense. Total operating expenses stood higher at USD 2,212.5 million, increased from USD 1,451.3 million in FY20. Income from operations stood higher at USD 268.6 million v/s USD 90.1 million in FY20.
• The group reported a net unrealized gain on equity and other investments amounting USD 2,859.8 million in FY21 and reported a lower interest expense from FY20. Hence net income stood higher at USD 2,914.6 million in FY21, as compared to USD 319.5 million in FY20.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company has reported a lower cash conversion period of 46.2 days in Q4FY21, as compared to 55 days in Q3FY21, which indicates that the company is taking lower time to convert its investments to cash flows. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a single-digit upside (in percentage terms). Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SHOP at the last closing price CAD 884.38 on March 23, 2022.

One-Year Technical Price Chart (as on March 23, 2022). Analysis by Kalkine Group

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