July 28, 2022

Value Matters – The Rise and Fall of Shopify

The United States is known for producing some of the world’s largest technology companies—think Apple, Google, Facebook, and Amazon. Historically, Canada has not had the same success in the tech space, so when a new e-commerce software company started growing rapidly, investors got excited. Enter, Shopify.

Shopify is an Ottawa based company that creates software to support businesses online and helps them sell their digital and physical products. The company has grown rapidly since its inception in 2006 and had its initial public offering (IPO) on the Toronto Stock Exchange in 2015. During the subsequent years, the stock performed well, experiencing explosive growth during the pandemic, getting as high as $214 per share (adjusted for a 10-1 stock split in June 2022).

In late 2021, Shopify was considered the new darling of Canadian tech, even overtaking RBC as the largest Canadian company by market cap. Investors continued to pile into the stock with excitement, speculating about the future growth of the company with many analysts calling for higher and higher price targets. At the time, it felt like Shopify had nowhere to go but up—until it didn’t. From November 19, 2021, to July 27, 2022, Shopify plummeted from $214 a share to $41 a share, representing a loss of nearly 81%. Shopify is a great company, but a great company does not necessarily equate to a good investment. For example, a large majority of investors in Shopify bought during the Covid rally and have now seen their initial investment lose a lot of its value. A picture says a thousand words.

*SHOP.TO performance from July 27, 2018 to July 27, 2022, adjusted for stock-splits, dividends, and capital gains. Data from yahoo finance.

What can investors learn from the recent Shopify sell off?

1) Be conscious of the price you pay for an investment

A company’s stock price is the present value of its futures earnings. Future earnings by nature are unpredictable. They are driven by a variety of assumptions, including interest rates, growth rates, and company specific factors. Sometimes, as in the case with Shopify, investors get overly excited about the prospects of a company and drive the stock price beyond what it should be worth, known as its “fair value.” Determining the fair value of a company is a difficult task, and a portfolio manager can help you determine if an investment is undervalued, fairly valued, or overvalued.

2) Be careful with overexposing your portfolio to any one stock

Shopify is a great example of the risk associated with owning individual stocks. Investors with concentrated positions in Shopify experienced massive losses in their portfolios relative to investors who had a more diversified approach. In hindsight, a smart investor would have bought Shopify at the beginning of the pandemic and sold before it crashed. The reality is an investor’s behavior tends to work against most—investors do not have the courage to sell their position when the stock is going up and have an aversion to selling their stock when it starts going down. A portfolio manager can remove emotion from the decision-making process and help build a diversified portfolio to reduce any single company specific risk.

3) Do not invest too much in the stock of your employer

High growth technology companies like Shopify tend to have compensation packages that include a salary and share based compensation. Share based compensation provides employees with stock options on the company stock. These options give employees the right to buy and sell the stock at specified price over a specified period. These options can be worth a lot if the stock appreciates in value, however, they can be worth a lot less if the stock performs poorly, as was the case with Shopify. Stock options can be a great addition to your overall portfolio, but when isolated, they can be risky.

Northfront specializes in investment management, financial planning, and alternative investments. We understand the value of utilizing holistic and broad strategies in terms of your investment portfolio to avoid situations like the recent rise and fall of Shopify. If you would like to learn more about our approach and diversified investment portfolios, including how the use of alternative investments can complement your portfolio, please connect with us.

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

Share Post: