Cannabis industry helps Shopify Inc. to a 145.2% earnings jump

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Cannabis-Connected

Many Canadian cannabis producers have signed e-commerce deals with this firm to get real-time snapshots of their entire business, including inventory, shipping and payments across multiple sales channels.


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SHOPIFY INC., $423.94, symbol SHOP on Toronto (Shares outstanding: 111.5 million; Market cap: $47.3 billion; www.shopify.ca), offers merchants of all sizes Internet-based software to design, set up and manage stores across multiple sales channels. They include both permanent and temporary retail stores, but also web, mobile and social-media platforms.

The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.

The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.

Shopify continues to attract more merchants to its platform. As a result, its revenue in the three months ended March 31, 2019, jumped 49.5%, to $320.5 million from $214.3 million a year earlier. (All figures except share price and market cap in U.S. dollars.)

Excluding one-time items, the company made $10.3 million, or $0.09 a share in the quarter. That’s up 145.2% from $4.2 million, or $0.04 a share, a year earlier. It also beat the consensus forecast for a loss of $0.05 a share.

The company’s balance sheet is strong: it holds cash of $2.0 billion and has no debt.

To boost sales outside of the U.S. and Canada, the company is launching more seamless international currency transactions and support for users in more languages.

In addition, cannabis growers and retailers continue to choose Shopify’s software and services to help manage their operations.

For example, the British Columbia government selected Shopify to provide an e-commerce platform for the online sale of non-medical cannabis. The B.C. Liquor Distribution Branch will be the sole wholesale distributor in the province, although its retail locations will compete with private sellers. Shopify will create two separate websites to fulfil online orders: one for consumers, where the age of the purchaser will be verified, and the second for public and private retail stores. Couriers will also verify the age of buyers at delivery. At-store pickup of online orders is still under consideration. The B.C. distribution centre for orders will be located in a 6,500-square-metre facility in Richmond.

The Ontario Cannabis Store (OCS), a subsidiary of the Ontario Liquor Control Board, also uses Shopify’s e-commerce platform to power its online cannabis website. While the government of Premier Doug Ford continues to issue permits to private retailers to sell cannabis, OCS will still be the only online seller of cannabis, at least for now.

Among licenced Canadian cannabis producers, Canopy Growth, Aurora Cannabis, Hydropothecary Corporation and Hexo Corp., have signed e-commerce deals with Shopify.

The company’s contract wins with marijuana growers and retailers—including governments—represent only a small part of its current revenue. However, industry contributions to revenue and earnings should continue to rise after legalization given the company’s leading software and services. Shopify’s experience in Canada will also give it an edge as other countries begin to legalize cannabis.

We think Shopify shares have room to rise. Meanwhile, though, the stock trades at a very high 555.5 times the forecast 2019 earnings of $0.58 U.S. a share.

Shopify is a worthwhile hold.

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