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Jul 30, 2018

Shopify won’t see quick payoff from pot legalization, analysts say

Shopify

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When Shopify Inc. (SHOP.TO) reports second-quarter results Tuesday, investors will be looking beyond the latest three-month period to what lies ahead for the tech darling, including its role in Canada’s burgeoning cannabis sector.

As the country gears up to legalize recreational pot on Oct. 17, the Ottawa-based e-commerce company has reached agreements to power the online retail sites for marijuana producers including Canopy Growth Corp., Hydropothecary Corp. and Aurora Cannabis Inc. In addition, Shopify has won government contracts to be the online platform for recreational-pot sales in Ontario, British Columbia and Prince Edward Island, as well as the majority of private licensees in Manitoba and Saskatchewan.

Shopify’s play in Canada’s cannabis sector could be a significant boost for sales growth – but investors will have to wait a few more quarters before that’s proven, according to Tom Forte, managing director and senior research analyst with D.A. Davidson & Co.

“If mid-October is when [cannabis] gets legalized, then the earliest you would expect the revenue to hit Shopify would be the fourth quarter,” Forte said in a telephone interview with BNN Bloomberg. “And then, to the extent that one would imagine there would be some period of ramping up ... it could serve as a catalyst for sales in the first quarter.”

For now, analysts expect Shopify’s revenue jumped 54 per cent year-over-year to about $234.9 million in the second quarter, according to data compiled by Bloomberg. Shares in Shopify, one of the hottest stocks on the Toronto Stock Exchange, have gained 64.8 per cent year to date.

Analysts will also be watching how merchant growth is faring. In a note to investors last week, Forte forecast a 25-per-cent increase to 625,000 merchants in the second quarter. 

However, Forte added that he’s looking for what effect Facebook Inc.’s results last week – which revealed disappointing user growth and led to the tech giant losing nearly US$120 billion in market capitalization – may have on Shopify, which allows its users to set up stores on Facebook.

Shopify strikes agreement with Aurora Cannabis

Aurora Cannabis has reached a deal with Shopify to become its e-commerce engine. Jon Erlichman explains.

“Given [Thursday’s] news it’s interesting to think if there’s any ‘Facebook fallout’ for Shopify,” Forte said.

“While I think there are elements of Facebook that are beneficial to Shopify, I don’t think it’s a needle-mover. But I do think it will be interesting to see when [Shopify] reports if it will comment at all on the recent challenges for Facebook and if that’s had any impact on merchant growth or [gross merchandise volume] on the platform.”

In addition, investors will be looking out for long-term risks coming from Shopify’s competitors. In May, rival Magento agreed to a US$1.68-billion takeover by Photoshop software provider Adobe Systems.

Blair Abernethy, managing director and technology equity research analyst with Industrial Alliance Securities, said the acquisition will be an “incremental negative” for Shopify. 

“Magento will now have significantly greater resources to develop, integrate and market its mid-market e-commerce platform under the Adobe ecosystem,” Abernethy said in a July 18 note to investors.

“Over the past two years Shopify Plus has been able to convert many customers off of the Magento platform, but, going forward, this source of new e-commerce customers may be more difficult to entice away from Adobe.”