Shopify's top seven executives — led by chief executive Tobias Lütke — collectively have sold more than $140 million worth of shares since the fall of 2015, according to documents filed with the U.S. Securities and Exchange Commission.
Little more than two years after Shopify first sold shares to the public, it’s clear something special is happening at the e-commerce software company.
It’s not just that its share values have nearly quadrupled during this period, or that revenues have tripled. The intriguing part is Shopify’s larger transformation. For years, the Ottawa region has been aching for a global leader to anchor its high-tech community — to fill the void left by the failure of Nortel Networks and the exit of JDSU.
Shopify just might be on the way to becoming that company.
We’ll know more Tuesday, when the 13-year-old firm reports its second-quarter financial results. The consensus forecast, according to Thomson Reuters, is that Shopify will have revenues of $144 million U.S., up a sizzling 66 per cent from the same period a year earlier.
The company is expected also to record a loss of seven cents per share, a deterioration of three cents per share year over year. But losses are not unusual for a firm that is growing so rapidly. Shopify has been investing heavily in staff, infrastructure and R&D so it can support an even higher level of sales.
On its current trajectory, the firm will break even in the fourth quarter and revenues for the year will top $628 million U.S. As long as Shopify stays on track, it will continue with plans to triple the size of its downtown Ottawa headquarters to 500,000 square feet by year-end 2021, and boost staff locally from 750 plus to roughly 3,000 over the same period.
Tuesday will mark the ninth time Shopify has reported quarterly results since it became a public corporation. To date, it has beat analysts’ forecasts every time. The danger, of course, is that if the company fails Tuesday to at least match the projections, Shopify share values could take a dramatic tumble.
In the meantime, the company and its executives have taken advantage of an extraordinary run-up in share prices. Shopify in May sold more than 6.3 million shares at $91 U.S. each on the New York Stock Exchange to raise $575.6 million U.S. The stock closed at $42.87 U.S. as recently as year-end 2016. The company is now sitting on a cash mountain of nearly $1 billion U.S., which it intends to use to further invest in the business, perhaps acquire other firms, and provide rock solid stability for the balance sheet.
Shopify’s managers and longer-serving employees have similarly been shoring up their financial accounts.
The top seven executives — led by chief executive Tobias Lütke and chief creative officer Daniel Weinand — collectively have sold more than $140 million worth of shares since the fall of 2015, according to documents filed with the U.S. Securities and Exchange Commission.
Ordinarily, members of the public considering the purchase of Shopify shares would view all this sales activity as a red flag. What do the managers know that they don’t? This is especially true given the fact most of the sales were at prices well below Friday’s closing price of $92.98 U.S. on the NYSE (and $115.66 Cdn. on the TSX).
Daniel Weinand joined Shopify in August 2005 and co-founded the Shopify platform that launched in 2006.
Shopify executives, for instance, have taken advantage of nearly every window of opportunity available to them since 2015 to sell shares at prices averaging less than $50 per share.
Nevertheless, this pattern is fairly typical of startups at this stage. Founders and early employees acquire shares for pennies, then sacrifice a lot in terms of hard work and time in the hope their company will succeed. Nine times out of 10, startups either fail or develop into entities that aren’t very special. Shopify proved the exception, and the outsized rewards to the people who built it need to be seen in that light.
Nor are Shopify’s managers exiting their firm. Even after the recent spate of share sales, some 3.2 million plus, the executives maintain the majority of their stake in the firm. Co-founder Lütke, for instance, has sold more than a million shares yet still owns 88 per cent of his original holdings. The company currently has an estimated 104.8 million shares outstanding. Investment funds such as Fidelity Management control a large minority.
The bulk of Shopify’s employees have not fared as well. For one thing, they are rewarded with relatively few share options — and these are earned, typically, over a four-year vesting period. About 40 per cent of the firm’s global workforce of 2,000-plus has been hired in just the past 15 months, which means they would have acquired their right to buy options at a relatively expensive price. Not only that, but Shopify shares in the past few weeks got caught in a general pullback in the value of tech stocks. Shopify’s share price on Friday was down significantly from the peak of $100.80 U.S. on the NYSE and $135.42 Cdn. on the TSX.
Short-term fluctuations like this won’t matter if Shopify’s young workforce continues to produce as it has. More than 400,000 small to medium-sized businesses worldwide use Shopify’s software platform to sell and distribute goods and services online — up from 162,000 little more than two years ago. Merchants pay a subscription for the platform, and fees for Shopify services ranging from managing inventories to processing payments.
The bigger Shopify gets and the longer it thrives, the deeper its knowledge about online retailing and what drives it. Shopify has also aligned itself with some of the biggest names in technology. Its customers can sell directly through Amazon.com, eBay, Facebook and other channels.
What can go wrong? Potentially, a lot. Shopify’s business depends heavily on trust. Serious breaches of security involving its data centres and customer records would damage the company’s reputation.
To date, Shopify has shown it can manage rapid growth very well, but whether that will remain the case as the company tops $1 billion U.S. annually in sales is unknown. With increased heft, too, comes higher visibility and the possibility Shopify could be acquired by one of the industry’s giants.
Also, will Shopify’s programmers will be able to stay on top of so many software changes — an inevitable concern in a system that relies on the complex interaction between customers’ constantly evolving browsers and the heavy duty hardware that controls the Shopify network?
There’s plenty to worry about, in other words, which will always be true when you are running a significant technology firm. This, too, is why Shopify and its managers have all socked away all that cash. It’s insurance for the rainy day they hope will never come.
