Anybody considering selling SHOP?

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I’ve been thinking about this for some time. The company had a great run, but I feel the market is a little too optimistic about it right now. I trust their technology, I trust the management, but I’m not completely sold on the business case and I’m afraid of the hype they are getting.

The problem with the business case is that it does not have a moat. They get called the “next Amazon” or the “next Facebook” but they are fundamentally different. Amazon has got a physical logistical network that is really hard to compete with. Facebook has got the user base. There’s none of that in Shopify’s business. No physical components to the business and the users (online retailers) don’t really care how many other users there are. What opened my eyes was when I talked to a developer a month ago who sets up web pages for small companies. I asked him if he had used Shopify for his last project and he said no - the customer was too small and Shopify’s price model did not make sense for him and there’s a lot of other options.

So here are the risks I’m seeing:

  • SHOP has been so successful because it could barge into the ecommerce business without too much resistance - because there is no moat in it. Another one company could do the same…
  • the company is still not profitable
  • it may have captured a lot of the ecommerce business quickly, but there will come a point of time when the space is saturated and the fight for new customers becomes hard
  • the hype around SHOP is high and the stock price reflects it

Given this, I’m going to sell a portion of my shares. It’s a good company doing well in a dificult business but right now the share price is out of synch with the risks…

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I have been struggling with this as well. They are great at what they do, but tech is tech.

The gains have been incredible over the past year, and at some point it would become foolish to not lock in some profits. The catch is FOMO and selling too early…

At this point, I just don’t see a good reason to sell, which is why I continue to hold.

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I think this is a great question and I agree with mess7777 that you’d be little f foolish not to at least consider that with a PS of 14+, the valuation is looking a little stretched. The real question is what is your strategy?

Quite recently, when SHOP shares were under $40, I invested over 25% of my portfolio in the company. I never meant for that to be my long term level. I just thought it was easily the #1 most compelling short term prospect I could find, and a long term almost lock to keep succeeding as well…that’s what I call a fat pitch. When shares jumped to $47, I took a little off the table. I just didn’t want to have that much of my money tied up in one company. I trimmed a little more at $51 or so, and then a little more at $56. It’s an allocation thing, not a prediction that the stock will go down (although it is true that as the price goes up, there’s an increasing likelihood that I’ll someday get a chance to buy again at a price cheaper than the current price). But as SHOP gets more and more expensive, other things I like get relatively cheaper and more compelling.

SHOP is still my #1 position, but at it’s current PS of just over 14, it’s a 13.5% position…a far cry from 25%. As much as I like the company and don’t see myself selling all my shares any time soon, there are limits to how much exposure I want at a certain price. Maybe the scenario is something like this, but I’m just making up the numbers:


PS    Position I'm comfortable with
<10     25%
12     20%
14     15%
16     10%
18     8%
20     6%

Again…making up the numbers and maybe they’re not really that meaningful. And also it depends what else looks like a fat pitch (e.g. HDP right now).

Of course I must point out that with a company growing like SHOP, whatever the PS is will not be the PS for long, because every quarter they almost double sales. However, at a PS of 20 it would take a double for full year 2017 just to get the PS down to 10, and maybe it’s my short-sightedness, but that seems astronomical no matter how long this amazing growth may persist. I don’t expect, and I don’t think anybody expects, that SHOP can grow at almost 3-digit percentages forever. You can only predict so far out, but they do have a lot going for them.

Bear

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Also one question:

I asked him if he had used Shopify for his last project and he said no - the customer was too small and Shopify’s price model did not make sense for him and there’s a lot of other options.

Shopify has rates starting at $9 a month for Shopify Lite or $29/mo for Basic Shopify…those don’t seem too expensive for any business. Maybe you can ping him for some more info? I’m sure everyone here would be interested.

Bear

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Here in Europe they don’t offer the $9 Lite version. If you want to get an idea about the competition in the e-commerce space, just scroll down this webpage

http://www.webshop-factory.com/shopsysteme

It’s in german, but you’ll be able to read the prices and see just how many different systems there are…

In the case above he got the PlentyMarkets where you only pay 0.1 Eur per sale and no monthly fee.

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The more profound issue is what do you get for the cost. The SHOP $9 offer is quite limited. What do you get for these cheap fares? In my profession, hire a cheap lawyer, get screwed is the usual outcome. Pay for a cheap website service and perhaps get crap.

To be sustainable any service will have to bill enough to maintain and improve its offering. If someone can do that, more power to them. At present, given how well SHOP is growing, such competition is not real competition at all.

SHOP makes money from real commerce, not just from volume websites. If you are a real merchant, you are not gong to save $28 a month as a trade off for a site with little functionality, little expand ability, and that is difficult to work with. Not to mention hosting and uptime, and all that.

$29 a month is absolutely nothing in the cost of running a business. These price comparisons ar meaningless. If your not really a merchant, then go away, use the free sites, or penny sites or whatever. But if you are a real merchant, that is who we want as our customers. That is who needs the best products, and tools, and uptime, and expand ability, and documentation, and all the rest.

This competition comparison, in this context, is not very relevant to SHOP. Rather, the relevance is competitors that offer the same qualitative services, expandability, hosting quality and the like. Really, $29 a month or $1 a month, is utterly irrelevant in the cost of running a business. You will pay more for the electricity running to your computer.

Tinker

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This competition comparison, in this context, is not very relevant to SHOP. Rather, the relevance is competitors that offer the same qualitative services, expandability, hosting quality and the like.

How much analysis did you put into this? I know you tried Shopify personally and you are very happy with their service, but don’t think they are the only ones offering these services. I talked to a person who has been setting up online shops for a number of years and the way he talked about it gave me the impression that Shopify is just one of many options. Have you tried any other highly rated system like Magento or PlentyMarkets?

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MAgento is legitimate competition, as is WIX. SHOP is not without competitors. I have not tried them all,no. I have read reviews. Reviews of course come with their own biases of the reviewer.
SHOP usually comes out on top of the reviews as it has the best and most intuitive interface, best documentation, most expandability, most and easiest pug ins, etc. And is the funniest to use.

This said, SHOP has competition. It is not a Microsoft like Gorilla and never will be. But as an application software and service, all you need is 25 or 30% market share to be a huge success.

To date the evidence is clear, SHOP is growing new merchants like weeds. The merchants are using SHOP, and SHOP merchants are not turning away to competitors or cheaper vendors.

I have learned that there is always supposition, speculation, concern, etc., but the best way to measure it is look at actual real world results. Those speak volumes about the product, and how SHOP is doing relatively to its competitors.

Tinker

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This said, SHOP has increased substantially into earnings. I would not be surprised at all to see SHOP sell off post earnings, even with good earnings. SHOP is selling for less than 10x revenues looking forward. I suspect. SHOP will raise its revenue guidance into 2017 as it is presently at 47% increase by aaalyst, which would be a very large decrease. If SHOP does boot increase revenue guidance the shares will most certainly sell off I think. They may sell off even if guidance is raised some.

So selling into the news in a situation like this is not a bad idea except tax wise. I have a ton of capital gains that I ain’t gonna pay. So I will not be selling, had no plans to sell anyways even absent the capital gain issue, but certainly with the issue, as there is no reason to sell from a mid to long term perspective at this time.

Tinker

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Let’s discuss your doubts more systematically.

- SHOP has been so successful because it could barge into the ecommerce business without too much resistance - because there is no moat in it. Another one company could do the same…

Several points in response:

  1. Easier said than done
  2. There are plenty of companies that sort of do similar things. Even Square. And people still build websites the hard way too, like your friend. There are plenty of customers to go around.
  3. The moat may exist in the brand equity they are building

- the company is still not profitable

They can pretty much slow their roll on re-investing in the business and show profit at any time.

- it may have captured a lot of the ecommerce business quickly, but there will come a point of time when the space is saturated and the fight for new customers becomes hard

Their TAM is extremely large, so I think that alone defeats this argument. But also look into the dollar-based net expansion rate. They are making more and more off the customers they already have.

- the hype around SHOP is high and the stock price reflects it

This I have already agreed with.

Bear

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Very stron results.

Shopify Inc. continues to outperform market expectations, exceeding analyst forecasts for revenue and operating profit for its fourth quarter and introducing targets for 2017 well ahead of analyst targets.

The Ottawa company, which provides a cloud-based software platform used by retailers to manage their e-commerce and bricks and mortar businesses online, said Wednesday it booked revenue of $130.4-million (U.S.) in the fourth quarter, an increase of 86 per cent over the same period a year earlier. Analysts had on average forecast revenue of $121.7-million in the period, while the company itself had guided the Street to a range of $120-million to $122-million.

The company also posted an operating loss of $9.3-million, up from $6.5-million in the fourth quarter of 2015. But analysts were watching for the company’s adjusted operating loss, which amounted to $0.8-million, less than half the loss analysts were expecting. The company posted a net loss of $8.9-million, or 10 cents per share in the quarter.

The results reflect Shopify’s busiest time of year, capturing sales through its platform from the U.S. Thanksgiving and Christmas shopping seasons. The company said gross merchandise value purchased through its merchants’ stores during the Black Friday through Cyber Monday period more than doubled the previous year’s activity.

Cont’d

http://www.theglobeandmail.com/report-on-business/shopify-en……

Chris

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So what would be a fair price for Shopify? :slight_smile:

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