|Shopify Inc (SHOP): How Does It Impact Your Portfolio?|
Casey Hall Simply Wall St.October 2, 2017
If you are a shareholder in Shopify Inc’s ( NYSE:SHOP), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures SHOP’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for Shopify
What is SHOP’s market risk?
Shopify’s five-year beta of 1.2 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, SHOP may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could SHOP's size and industry cause it to be more volatile?
With a market capitalisation of CAD $11.54B, SHOP is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. However, SHOP operates in the internet software and services industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of SHOP, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from SHOP’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
NYSE:SHOP Income Statement Oct 3rd 17
Can SHOP's asset-composition point to a higher beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine SHOP’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, SHOP seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect SHOP to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what SHOP’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of SHOP's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into SHOP.
Are you a potential investor? Before you buy SHOP, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. SHOP may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Shopify for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Shopify anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.