Ruth Saldanha: You may have heard about the Canadian curse. Any company that dethrones a Canadian bank to become the largest Canadian company in terms of market cap has since hit a major rough patch soon after. Some of the cursed names include Nortel, BlackBerry, Potash, and Valeant Pharma. So, investors were spooked when in May 2020 Shopify usurped RBC to claim the top spot, and this year, Shopify seems to have been hit by volatility. So, is this the curse at work? Morningstar Senior Equity Analyst, Dan Romanoff, covers the stock, and he's here today to tell us what he thinks.
Dan, thank you so much for being here today.
Dan Romanoff: Thanks for having me.
Saldanha: So, is Shopify cursed?
Romanoff: Well, you know, were the Toronto Maple Leafs cursed when they didn't win a Stanley Cup for a while because they weren't retiring jerseys? I got to say, I live in Chicago, so Cubs fans thought that we had the curse of the Billy Goat, and it took 100 years to win a World Series. So, is it cursed? I guess, anything is possible.
I hope that Shopify is not cursed because I'm not really sure how I would be able to write that in a research note and get it by compliance. So, I'm going to go with no, I don't think they're cursed. And it's interesting some of those names you mentioned, Nortel and Potash, and like, they had real problems. BlackBerry had real problems, and that was Apple came along basically right at that time with the iPhone. So, there were real issues going on there. And with Shopify here, that is not happening. Like all of U.S. software is down loosely 30% over the last couple of months since it peaked in November. Shopify is down approximately 30% as well over that same timeframe. So, it's basically down in line. And frankly, I would have thought Shopify would have suffered a little bit of a worse fate right now, just because it had one of the – it was trading at one of the highest multiples within the software group here. So, I'm a little surprised that how resilient it's been versus the group actually.
Saldanha: So, in your opinion, what has led to this particular correction? Was it broadly expected and for investors who aren't in Shopify, is this a buying opportunity?
Romanoff: So, was it expected? I mean, certainly, it was widely held. So, I think a lot of investors sort of loosely expected a correction. And we've all seen the headlines about inflation, about new COVID variants, rising interest rates. So, we see those headlines. You see this massive rotation going on from growth stocks to value stocks. I thought for much of 2020 – well, the last half of 2020, much of 2021 that software was sort of at least fairly valued, if not overvalued, in a lot of spots. And now the pendulum has sort of swung back the other way to the point where you actually have some buying opportunities.
So, if you were looking at Shopify, we actually have an $862 fair value estimate in U.S. dollars. I think that's about $1,070 Canadian dollars. So, it's actually a little bit overvalued according to us still. And one of the reasons I say that, and I have to have this discussion with investors when they want to talk about is, in order to support some of these, like, higher stock prices, if you just back into what the stock price implies and you look at what kind of revenue growth you're talking about 20 years from now and you see like 20% or 25% revenue growth to support these stock prices, that is really tough to do. And you're talking about like 25 or 30 years after the company is founded, and the revenue – just the dollar amounts at that point really start getting carried away. So, that's why we have a lower fair value on it still than where it's trading. So, of course, I wouldn't recommend buying it here. That said, I think it's a great company. I think they have a great product. Their portfolio is right where it needs to be in serving the SMB and the mid-market. The building out of third-party logistics, a full solution there, I think is a great move strategically. So, there's a lot to like here. It's basically you need to be comfortable with the valuation, and that's just not something that I can do.
Saldanha: So, what should investors who currently hold Shopify do?
Romanoff: Well, some of these high flying, sort of high volatility names like early on in the pandemic as these like shot up quickly, I was immediately saying some of the other remote work tools, Zoom, DocuSign, some of the lifestyle names, like remote lifestyle names like Shopify, were quickly highly overvalued in my opinion. So, when I was writing even a year-and-a-half ago is these things are trading at valuation levels that are simply unsustainable. And fast forward to today and you see this big sell-off and you see names like Zoom and DocuSign, not that you're asking about those specifically, but they're kind of in the same group, they're down sort of 50% or maybe even a little more, and Shopify is down 30%. So, they're good companies and there definitely is a use case for the solutions, but at the same time, it's hard to support the valuation.
So, in the case of Shopify, if I was a Shopify investor, I still would be – I would trim it out because that is – I can't support the valuation, and I think at this point, you can get some what I think are really blue chip, really high-quality great names, like for example, Salesforce or Adobe or ServiceNow, that have already been hit pretty hard, just along with the rest of the software. But in the case of Adobe and Salesforce specifically, these companies have already reported, they reported a quarter at the end of November in the case of Salesforce; Adobe reported mid-December. So, you, kind of, already know what's going on internally. You've already seen the guidance. So, they've been de-risked in my opinion just on a tactical basis. So, actually, that's where I would be poking around first.
Saldanha: Thank you so much for being here and sharing your perspectives, Dan.
Romanoff: Sure, no problem.
Saldanha: For Morningstar, I'm Ruth Saldanha.
