Bert's Comments on the Shopify short

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Someone already published this on a different thread, but I think it some will miss it who would be interested, so here it is again:
Saul

I initially recommended SHOP when it was $42. I sold it when it reached $93. I have certain disciplines and was not able to justify the valuation. I also am a SHOP customer.

Andrew Leff and his Citron Research are evil, dishonest and ignorant. SHOP is about as far from the Herbal Life paradigm as anything I can imagine. Much of this man’s evidence is spurious, contrived and mendacious. It is relatively easy to do a deep dive on this name and determine what it is all about. It is not about fraud or misrepresentation or get rich quick. It provides tools for real people to build a web store. One can look up plenty of user testimonials. [Here is mine (Bert’s): “If you want to build a great web store and sell lots of product, try Shopify”.]

Andrew Leff makes a living so-called by using slander and credulity as tools to gull those who want to believe he knows what he is doing. Is what he is doing free speech. I do not know. But after I saw what his MO was in slandering Ubiquiti, I have resolved to simply ignore his ill-tempered and poorly expressed sentiments.

For me, SHOP shares are expensive and thus I do not own them. But if this man drives their price down, I will surely reenter the name.

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When somebody has to compare Shopify with Herbalife business model to justify their short thesis, that tells me there is not much credibility. Anyway, I view the drop as more related to valuation, market just needs a reason to drop the share, not anything related to business model weakness. This is hard part of holding good company in long term as there are so many times we will see significant stock price drop, noting to do with company business. Similar happened before with Amazon in the past 20 years.

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I do not pay any attention to the Herbalife thing, or most of what Citron said.

My reason is two fold (1) valuation, and (2) actual serviceable market. The two go hand in hand. Everyone keeps saying that SHOPs TAM is every retail business in the civilized world. When in actuality, not so much. SHOP is using affiliates, thousands of them, to bring in new business. Which is great. The problem is the aggressiveness of these affiliates is yet another band of consultants running out with hard sales pitches. I still get the same for pay per click experts.

The real value for SHOP is the number of quality businesses they can produce and retain. That is the long-term value of SHOP. Not fly by night, get rich quick, high churn business.

That is why I sold, the valuation had gotten too high compared to the actual Service Addressable Market (SAM).

It also seems that SHOP is caught in a consequence of its high share price. It has to continue maintain growth at all costs, and if it does not its share price will crater. Thus, high quality, low quality, all quality, they are pushing to retain as clients because it is the numbers that count, and not the quality of the numbers.

I still do not understand why SHOP did a secondary when they already had $500 million in cash. Don’t tell me it was just because they thought they might need the money. I have never, ever, seen a company do that before, other than SHOP thought there would be no better time to raise cash, as the business will never be so relatively high valued.

This all said, SHOP is the bet eCommerce enabling product in the world. Anyone serious about starting a web based business, SHOP is probably the best place to go and is getting better. SHOP has great materials, great technology, is very customer friendly, and if you are a web builder, why would you not use SHOP as your underlying technology? A web builder would have to tell me. I don’t use SHOP for my primary web-site. I do not know why, other than legacy issues.

In the end I see a difference between quality businesses vs. junk businesses and part of SHOPS growth (I do not know how material a part) is the latter, not the former.

Given the upside vs. valuation, just like Bert, I saw better opportunities elsewhere.

Nothing to do with FTC violations or Herbalife or any such thing like that.

For whatever it is worth, that is my reasoning, I believe I explained it before. I look forward to SHOP proving my perception wrong. Because it is a perception, experience combined with intelligence and the nature of these things. I do not know. But then none of us know. If we knew there would be no big losses, and also no big gains.

Tinker

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When did you sell your position, Tinker? Before yesterday, yesterday, or today? Are you all NVDA and ANET now, or do you have a 3rd holding?

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Volfan,

I forget exactly. Was not long ago. Not more than a few weeks I don’t think. Was some cross board conversation regarding it. I am still NVDA and ANET. Except for SHOP I am trying not to get back to real time position reporting as I am really, really, really trying (not so successfully) to pull back some from the market and just contribute every month, so I can focus on other things. SHOP was just a special case.

But yes, NVDA and ANET. SHOP was also a long-term hold for me, so I have long-term capital gain treatment, which also created more flexibility. I bought an awful lot of it early, and never made any subsequent buys. My NVDA purchases are stretched out, some long-term capital gain, others not. So decreases flexibility.

My current attention is not to sell either for quite some time and follow how I would like to invest in respect to the rest of my life, which is just contribute every month. But as with so many things, once the shooting starts the battle plan goes out the window :slight_smile:

Tinker

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That is why I sold, the valuation had gotten too high compared to the actual Service Addressable Market (SAM).

Can’t argue with selling on valuation. But is the valuation really that high now?

It’s TTM EV/sales is now 16.8 versus around 20 before the drop. Sure, you can argue that this is high. But then you look at the sales growth rate. It’s rate of growth has not declined. They added 25% more merchants to their customer base just last quarter. How many of their merchant’s are high quality businesses which will grow and thrive versus how many are business that will not be businesses in a few quarters? Start-up failure rates are high so we have some distribution curve and we can expect merchants to drop off; is this curve changing or is it relatively constant? The GMV growth over time is a clue. The number of merchants over time is another clue. Now, since SHOP is growing customers and revenue so fast, it should deserve a higher valuation. Project the sales for based on the current growth rate, we get a future (1 year) EV/sales of 9.3 which is not that different than the current TTM EV/sales valuations of other high growth tech companies that we follow. And if the recent acceleration in merchant number growth is sustained going forward then we may well have a bargain valuation. We get another data point in a few weeks…

Chris

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The issue is not just the valuation relative to past performance and short term future performance, but the expectations for longer term performance. I think that the SHOP skeptics are simply saying that they either don’t think the market which SHOP can convert is really large enough to sustain long term growth or that SHOP doesn’t have enough moat to prevent someone else from coming in and taking significant parts of that business.

It is one thing to grow rapidly from relatively small numbers and another thing to sustain that growth long term. One can understand that growth for someone like LGIH because really they still are only selling a tiny percentage of all possible new homes so any issues of this sort are far in the future. But, SHOP?

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Before I search for this, does anyone know the distribution of sizes in Shopify’s customer base? How many large and medium businesses could still sign up with them? How much of their money is made from viable small businesses? And how much is froth from businesses with a short life expectancy?

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I share Bert’s reservations over price.

What fascinates me is the analysts who have come to Shopify’s defence, yet supply no defence against what is to me the key question (and the main one raised by Citron)!

Credit Suisse answers 6 good questions of its own but omits to address the elephant in the room (or mammoth): valuation. Baird does the same. They seem to think reciting the undoubted qualities of the company and easily swatting away the spurious points is enough, followed by a price based on - what?

Totally failing to answer the question earns no marks in an exam.

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Meanwhile, from National Bank of Canada, an attempt at a little technical analysis!

0/10, F for effort.

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“Bert’s Comments on the Shopify short”
Someone already published this on a different thread, but I think it some will miss it who would be interested, so here it is again:
Saul

FYI for those interested, here is source of Bert’s comment on Shopify short:
https://seekingalpha.com/article/4111761-shopify-response-ci…

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“That is why I sold, the valuation had gotten too high compared to the actual Service Addressable Market (SAM).”

can you elaborate quantitatively (since you seems to think this can be done to some accuracy)?

and what about when they start to have profit? won’t they grow their earnings and that can also be a way to increase the market cap?

tj

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According to Citron’s report they have 2,500 Plus customers (at $2k or more per month) and 20,000 Advanced customers (at $300 per month). That would be roughly half of their revenue. The other half would come from the much greater number of basic customers. We don’t know how many of those are going to be 3-month failure stories and how many of them are strong businesses that are on the edge of upgrading.

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I have no problem with the price at any point in the 52-week range. The reason is an analysis of the return on the marketing budget and what would happen if that was just re-invested in the business. Shopify is at a point where it could just take what it brings in now, use that to grow the business very quickly, and be profitable every quarter. The results so far show potential for an eventual valuation that’s at least close to $100B.

The main things that could stop this are:

  • The growth rate falling off (depends on your view of the total market; my view is that a lot of Shopify’s customers 5 years from now may not exist today so it’s hard to estimate this)
  • The company running out of capital and having to dilute shares (the balance sheet says no)
  • The R&D costs staying at the same percentage of sales (the story so far seems reasonable to justify this decreasing over time)

On the other hand my analysis didn’t account for possible growth sources like adding new services for existing merchants, which they almost certainly will do. Or the fact that the revenue from each cohort of new merchants keeps growing. If that changes I’ll take a very hard look at whether it makes sense to hold.

The funny thing? If the market cap was $1B (as it was not long ago) and someone says it could grow to $100B, that would sound like a crazy return and you would have lots of reasons to doubt it. If it’s $14B (like last week) and someone says it could grow to $100B, that sounds like a normal growth story.

For those who believe in the growth the higher share price makes it more attractive in a weird kind of way. Good ol’ confirmation bias :slight_smile:

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