Crazy developments are happening in Canada with Cineplex falling steeply and Shopify becoming bigger than the Canadian Banks. Here’s what might happen next.

Cineplex stock is seeing a steep decline in its stock. Currently, the company is at $8, which is a 77% drop from its most recent peak. It was once a company worth $3B at its all time highs in 2017 and now it's at $500M. Prior to the COVID-19 shutdown, the company was in process of being acquired by Cineworld, a UK-based theatre. They offered to buy Cineplex at $34 per share but that deal has long faded away since social distancing rules came into play immensely hurting the operations of both companies. Adding to pains is that Cineplex is expecting financial issues in the future with paying down debts due to so many months of being on pause, and theatre attendance already going downhill over the years with the trend of online movies platforms from Netflix, Youtube, Disney, Amazon and even Apple. Right now the company has around $2B in combined debt and lease obligations. The amount owed is 4x the company’s current worth of $500M. In a normal world without COVID, its debts would still be manageable with the money it generated from doing business, but having operations paused too much, little amounts of cash on hand and lines of credit almost fully drawn, it can be pretty difficult to keep going without additional financial resources.

What’s next? With Cineplex’s market value testing new lows, it can attract potential acquirers once again. I wouldn’t be surprised if cash-rich prospects like Amazon, Apple or Disney were potential buyers and planned to set up exclusive theatres for their films, gaining great locations across Canada. But my guess is a large investment firm, like ONEX, could buy the company and take it private to operate. If Cineplex isn’t acquired and continues operating independently, then it could start closing down its least profitable locations on its own and just stick with its most populated areas. At the end of the day, I suspect that the business will be forced to downsize and it will double down on its premium services.

Shopify, on a huge contrast, has become the fastest growing Canadian company this decade and is now the biggest company in Canada. With the ecommerce platform still seeing a lot of usage and new growth in various countries, there’s still a long runway for it to keep pushing forward.
As of today, Shopify is now larger than any of the Canadian Banks. Just comparing the market capitalizations of Shopify and the big 5 Canadian Banks, the company is 17% bigger than RBC, which is now the 2nd largest Canadian company, and at its size Shopify could take over the smaller 3 banks, combined. But when you compare the revenues or sales that each generates, it’s a stark difference. And although Shopify isn’t a bank, even though it does provide small loans to its platform users, it really speaks to how much investors care nowadays about what a company currently makes. But of course the stock market is forward thinking and loves growth potential. Simply the faster growing companies that can grow consistently are much more appreciated by investors, just so long as they can produce some evidence of profits.

Many like to think of Shopify as the up and coming Amazon. If we make a comparison of the two, Amazon is currently 12x bigger in market cap, 200x more revenue, and grew revenues at less than half the rate in the most recent year. If you go back to when Amazon was the same size, which was back in 2013 at a $300 stock price, revenues were 39x bigger but the growth was consistently still half the rate. If you assumed Shopify keeps its pace of 47% revenue growth every year, it would take another 9 years to match the old Amazon’s $77 billion in sales.

With these numbers, Shopify looks overvalued. So what’s going to keep pushing the stock up? Personally, I think it has to be a combination of even higher growth rates and profitability. Based on revenues, $2B is still small enough to grow substantially, perhaps by acquiring smaller companies, making more brand deals, and if they continue to see a surprisingly huge adoption of their platform by customers in existing and new geographies. For profitability, Amazon takes home around 5% of revenues. Back in 2013, that was 1%. Right now Shopify is at 3% (adjusted) and getting close to that 5% fast even though it is still in an early high growth spending phase. I suspect that as a cloud-based company, in the long term they will be more along the lines of Google and Amazon Web Services with a 25% profitability level in the future if they spend less from letting automation do the work, and revenues continue to rise.

Book recommendations:
Intelligent Investor: https://amzn.to/2U9oZDe
Rich Dad Poor Dad: https://amzn.to/2ADNu5w
One Up on Wall Street: https://amzn.to/2Y40Cdn
The Wealthy Barber: https://amzn.to/2C7vnFG
Millionaire Teacher: https://amzn.to/2MUU5eD

#Cineplex #Shopify #Canada