Bert's latest take on SHOP

[wouter28]

Bert Hochfeld just put out a very detailed article on SHOP’s Q3 earnings and the market’s reaction to it:

https://seekingalpha.com/article/4120159-shopify-volatility-…

Summary
-Shopify announced the results of its Q3 earlier this week.
-The results were a beat and raise quarter - the shares fell by more than 10%.
-Guidance, as has been the case indefinitely, appears to be conservative and designed to be beater.
-Almost all of the key operating metrics that are tracked by investors/analysts were positive and the company actually reported non-GAAP profits sooner than had been anticipated.
-Company executives vigorously and credibly rebutted the ill-intentioned and ill-informed “research” from Citron that has plagued the shares - although not the company since it appeared.

Conclusion: I presently do not own the shares - I sold them at prices less than here. But to be fair that was a few months ago. I’m searching for the right entry point, which is usually more visible in arrears that prospect. I sometimes miss names by limiting my portfolio to 11 names. That shouldn’t matter much to readers.

Putting that aside, I think the shares can be attractive because there really is nothing quite like SHOP available to investors. There may be a speed bump when the company discusses guidance during its February call and probably winds up guiding Q1 to a set of conservative expectations based on retail sales seasonality. But for investors with a long-term horizon, wanting to own shares in what is clearly the best in class company in this space, SHOP is as good as it gets.

[mauser96]

The company’s improved gross margins are both a function of scale but also a function of a gradual mix shift to higher margin services such as Shopify Shipping and Shopify Capital. The opportunity for Capital is clearly enormous as can be seen from the growth that Square (SQ) has had with its offering

merchant cash advances would likely be significantly higher in this current quarter. I assume that at some point, SHOP, like Square, will arrange for third-party capital sources to fund its merchant cash advances.

There is, apparently, a strong appetite on the part of institutional investors for participating in this market with a loan originator that enjoys the advantages of Shopify.

What I can say is that I doubt that 40% growth, which is currently the published consensus on First Call for this company for 2018, could possibly support the current valuation, let alone propel the shares so that they might produce positive alpha. And I would be even more emphatic that investors are going to want to see a bit steeper ramp in terms of profitability and cash flow than is currently embedded in consensus numbers which call for EPS of just $.21.

I also would say that trying to put together a forecast for this company even one quarter at a time is likely to be a frustrating exercise. No one can write about the real size of a market that is just now being created

as usual, a well reasoned piece.
he puts down the Citron report but still does not wan to own SHOP

The big element for me is merchant lending. SHOP and SQ are doing something disruptive and innovative here.
For smaller merchants, banks will be displaced. Maybe mid sized merchants too.
We know how profitable banking can be, using somebody else money and skimming off the cream. The SHOP/SW model can do it faster cheaper and more profitably. Because they know their merchants in a way unobtainable to other lenders. This disruption has gone mostly unnoticed. Eventually it may lead not to just faster loans but cheaper ones too. What’s not to like?

[brittlerock]

Bert is an insightful voice in the tech sector. However he has strict criteria about what he invests in and it’s not growth per se. For the most part, he’s a “value investor.” My impression is that for Bert to make an investment he wants to see the EV/Revenue ratio fall within a certain range before he jumps in. Like everyone else, he makes some few exceptions (he’s long AMZN for example). But mostly he sticks to his formula. Honestly, I can’t find fault with his approach. There’s more than one way to make money in the stock market.

[FourthStooge]

The SHOP/SQ model can do it faster cheaper and more profitably. Because they know their merchants in a way unobtainable to other lenders. This disruption has gone mostly unnoticed. Eventually it may lead not to just faster loans but cheaper ones too. What’s not to like?

Some years ago, I invested and lost a lot of money in a company called First Marblehead, which used proprietary data to make money in the student loans business. They understood the student loan environment better than anybody else. The description you wrote could have been written about FMD back then.

When the financial crisis hit, the business as well as the share price plummeted. They are no longer a publicly traded company, having gone private in 2016.

I am not saying that Square and Shopify are the same as First Marblehead. In fact, they are fundamentally different, almost to the point where this comparison seems too absurd to mention.

But I like to keep this experience in mind when I get too bullish. When a recession hits and people are unwilling to take out loans to expand their businesses, SQ and SHOP will certainly take a hit.

At least I feel that when this happens, I’ll know what to buy with my dry powder and on margin.

I just wish that I could figure out when this will happen.

DJ

P.S. If they are really successful, perhaps they will contribute to recessions in general not being quite as bad, because they can better determine credit risk and are more willing to make loans than traditional banks during such challenging times.

[Cat9MixCloud]

But I like to keep this experience in mind when I get too bullish. When a recession hits and people are unwilling to take out loans to expand their businesses, SQ and SHOP will certainly take a hit.

It’s not so much they are unwilling to take out loans, it’s that loans dried up because people went bankrupt along with businesses.

When the Great Recession resulting from the Housing Crash flooded over our economy, it was based on consumers who could no longer pay their loans on not only homes, but cars, boats, motorcycles and other toys.

Repossession of assets whose market value was lower than money owed on the loans wiped out developers, brokerages, pension funds, hedge funds, Wall Street firms, mortgage giants, REITs, etc., and almost bankrupted the 3 car giants of Detroit and what was the world’s biggest insurer, AIG.

Money lending/money renting is a very risky proposition.

In the Great Recession, cash was king. Consumers could not borrow cash during Hard Times because lending standards did the tighten up. Businesses dependent on that money chain did the Tighten Up.

First tighten up on the loans
Come on now, lender
I want you to tighten it up for me now, oh, yeah
Tighten up on that insurer now
Tighten it up, ha, ha, yeah
Now let that car dealership fall in
Oh, yeah
Tighten up on that business and that renter now
Yeah, you do the tighten up, yeah, now

[billyfreezr]

Maybe that’s why they did the secondary and raised almost 1 billion dollars. Protection against the recession for themselves and potentially their customers. Or not (shrug).

[Phoolio18]

Maybe that’s why they did the secondary and raised almost 1 billion dollars .

For the record they raised, less than $600M from the secondary.

Regards,
A.J.