SHOP & TTD - Why I sold one and kept the other.
Foodles asked me why I had sold out of Shopify, when its revenue growth dropped from 75% to 62% yoy and have never gotten back in, but stayed in Trade Desk when its revenue growth dropped from 61% to 41%. That’s a valid question. I explained why I got out of Shopify, but neglected to compare it to Trade Desk and explain why I stayed in.
First, here’s why I got out of Shopify: there were several issues. Shopify was having small drops in growth rate every quarter, as would be expected with size, while Square was having increases in growth rate in each of those quarters (in pretty much the same or closely similar fields). Then, the quarter that I, and others, exited, the economy posted a huge rise in GDP and consumer spending, and instead of Shopify responding, they had a huge drop in growth rate. In addition it looked as if their basic small business customers had reached saturation and they were relying on Shopify Pro for future growth.
In fact, I found my sell-out in my August monthly summary. Here’s what I wrote at the time:
I had reduced my Shopify position gradually over a couple of months but it was still one of my major positions. However, in early August I sold out of it in shock when their rate of revenue growth, which had been falling every quarter, precipitously fell in a quarter when the economy was very strong and in which Square, in a market quite similar, had huge results, following on top of increasing rates of growth in all the quarters where Shopify had falling rates of growth. My average sale price for Shopify was about $145, about 537% of my initial purchase price which was $27, two years before.
Here’s the way I see it:
In the Mar 2018 quarter the rate of growth dropped 7 points from 75% the year before to 68%. 7/75 is 9% so the rate of growing dropped 9%.
In the Jun 2018 quarter the rate of growth dropped 13 points from 75% the year before to 62%. 13/75 is 17% so the rate of growing dropped 17%.
That’s when I got out. Since then, the rate of fall, instead of slowing down as the rate of growth decreased (as you would expect), has continued to accelerate each quarter:
In the Sep 2018 quarter the rate of growth dropped 14 points from 72% to 58%. 14/72 is 19% so the rate of growing dropped 19%.
In the Dec 2018 quarter the rate of growth dropped 17 points from 71% to 54%. 17/71 is 24% so the rate of growing dropped 24%.
In the Mar 2019 quarter the rate of growth dropped 18 points from 68% to 50%. 18/68 is 26.5% so the rate of growing dropped 26.5%.
Note that as the rate decreased the number of points of drop has increased every quarter instead of falling as you would expect. That’s eye-catching, enormous and consistent. That’s five consecutive quarters with the rate of growth dropping more yoy sequentially.
The last three quarters there rate of drop was 14 points, 17 points and 18 points, with no sign that the rate of fall of growth rate is slowing down. But lets assume the next three quarters fall just 17, 16 and 15 points. That would give them growth rates of 45%, 42% and 39%.
Their TTM adjusted EPS is 41 cents and they are selling at $259, which gives them a PE ratio of… Let’s figure here… 259 divided by 0.41 = 632. Yep, a PE of 632!!!
What’s holding Shopify up is speculation about cannabis, not anything that is currently improving. Shopify seems to me to have saturated its market universe of low-hanging fruit of mini-companies, and while its Shopify Pro is gaining, the vast majority of major enterprises are simply not going to hire Shopify to set up their website (and it would probably be thought of as insulting to most large enterprises to even consider hiring a company that specializes in websites for mini-businesses).
Look, three days ago, while riding the NYC subway I was in a subway car with a string of ads from Shopify saying '‘Let us start you a business. Turn your mom’s famous apple pie recipe really famous,’’ and a string of similar ‘Let us start you a business’’ ads. If I wasn’t out of Shopify already I would have sold out then. That said to me they are no longer finding enough self on boarding little companies and their move to big companies isn’t doing it. It looks to me almost farcical. Are they going to move a $28 billion market cap company 40% or 50% with ‘’Let us start you a business’’ ??? It seems like desperation to me. If I was a C-level executive for a major enterprise and saw one of those ads, would that make me think Shopify was for my company. No Way!
Now let’s compare with Trade Desk. Their rates of growth have been very lumpy. The last eight quarters 55%, 50%, 42%, 61%, 54% ,50% , 56%, and now 41%. Yes, we probably will never see growth in the 60’s again, but the last time they were in the low 40’s they jumped to the low 60’s the next quarter, and they also jumped at one point from 50% to 56%. Lumpy! No way to tell what next quarter will be. Let’s compare their progression with Shopify’s:
In the Jun 2018 quarter the rate of growth dropped just 1 point from 55% to 54%. 1/55 is 2% so the rate of growing dropped just 2%.
In the Sep 2018 quarter the rate of growth dropped 0 points from 50% to 50%. So the rate of growth didn’t drop at all.
In the Dec 2018 quarter the rate of growth ROSE 14 points from 42% to 56%. 14/42 is 33% so the rate of growing ROSE 33%.
In the Mar 2019 quarter the rate of growth dropped 20 points from 61% to 41%. 20/61 is 33% so the rate of growing dropped 33%.
After reading that I hope you can see the difference between Shopify’s progressive inexorable drop, and Trade Desk’s descent which is lumpy and unpredictable. Pair that with my perception of Shopify as having saturated its market, at the top of the S shaped curve and leveling off, while I see Trade Desk as just starting out. As the CEO says ’’We are at Day One of the journey.’’ Looks like a whole different ball-game to me, but I’ve been wrong before…. But considering the six analysts who raised their price points the next day, mostly by $25 to $30, right in the face of the reflex sell-off of $25 or $30, makes me feel that I’m not the only one who see’s it this way.
Oh, and by the way, Trade Desk has TTM adjusted EPS of $2.83, a price of $183.50, and a PE of 65. Outrageously high PE, but not when compared to Shopify’s 41 cents of trailing earnings and PE of 632. Shopify grew TTM earnings 18 cents from a year ago, while Trade desk increased theirs by $1.08. There’s just no comparison, as I see it anyway.. (And Shopify’s share price is close to $100 higher.)
Best,
Saul
