Brief comparison of SHOP and NVDA

Investment Analysis Clubs Saul’s Investing Discussions
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On the NVDA board I posted a brief comparison of Shopify and Nvidia. Here is is, slightly edited:

In a search for superstocks, Shopify and Nvidia are certainly two good candidates, but although they are both growing revenue enormously they are entirely different business models.

Shopify sells service on a subscription basis, and the thousands of companies that subscribe each spend more money each year on average, so you have all of this years revenue almost guaranteed to return next year, increased in size (i.e. recurring revenue), plus all their new business. People are willing to pay a lot for that, especially when revenue is growing at 80% per year or so, even if they are plowing all their profits into seizing market share (which then will be with them “forever”), resulting in no current profits.

Nvidia sells little bits of hardware, and sells them to a comparatively small number of huge powerful companies who have a lot of pricing power, and Nvidia thus has a much more concentrated customer base, so that if one of its big customers sneezes Nvidia may catch cold. That makes Nvidia much, much more vulnerable than Shopify. Also little bits of hardware have a tendency to get commoditized, even if that seems unlikely to happen to Nvidia’s little hardware pieces very soon. On the other hand, Nvidia is currently dominant in a lot of rapidly growing fields (as far as supplying these little pieces of hardware), and is making a bunch of profit ($3.45 per share), while Shopify is still growing profitlessly (also dominant in its field).

Overall, that’s why I’m willing to take positions in both, but a much larger position in Shopify, even if it has no profit yet, and Nvidia has a bunch.

Saul

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Numbers 1 and 3 for my self-managed portfolio (Apple is number 2), combining for over 34%. With NVDA having grown to > 27%, I’ve started to consider trimming that position a bit and freeing up cash for other opportunities.

Since starting to follow this board, I have added a bit to my UBNT position, bought a few Mulesoft calls, started paying attention to LGI Homes, Hubspot, Hortonworks, Talend, and now seeing corroboration on Paycom will be looking at it a bit closer. Those and several others will be some of what I will consider for using proceeds if I do trim NVDA a bit.

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Saul,

I don’t agree with your conclusions regarding the relative business models and one having more risk than the other.

First, as to the recurring business model (and I wrote about this on New Paradigm board) the PC market and server market and cell phone market proves that computers (unlike fiber optics - such as JDSU, where you just build out one big network and that is that, all that is left is maintenance) is a recurring business model.

Every year more computers of all sorts that produced and sold. Either it grows, or the number of computers sold falls, depending on the state of the economy, and what cycle we are in on the technology adoption cycle. Even though PC sales are in their waning end, sales are still only falling 5% or so a year, from growing every year, but whatever the case, even this worst case is “recurring” revenue.

In fact, there is presently a serious shortage of graphics cards for PCs (probably due to bitcoin type mining) so that the computer store I was in yesterday had posted a dozen or more signs, where no one could miss them, “Due to shortages, each customer is limited to 2 GPUs”.

These are referencing consumer GPUs for PCs. Only two companies really make them, Nvidia and AMD. So even in this slowing market, GPUs are hot and growing.

But point being, the computer business (unlike the fiber optic business) is a recurring business model by any practical definition.

Sure, SHOP has “recurring” revenue. But what happens in a recession? Those recurring revenues are not guaranteed AT ALL! In a recession, lesser businesses go out of business hard and fast. Most of Shop’s subscribers are lesser businesses. Sure, those who stay in business will continue to subscribe, but their merchant revenues will decline (n general) with the declining economy, and the overall growth rate of SHOP will crash to levels that will cause the share price to crash.

Don’t get me wrong, my only two holdings for the past 6 months (other than VEEV that I sold buy more NVDA) are SHOP and NVDA. So obviously I like both (I reserve the right to without notice sell or do whatever I want of course with any stock) but I have no illusions that SHOP’s “recurring” business model is a cushion or any more lock than is NVDA’s.

Neither company fits into the pattern of fiber and optical companies like INFN, where there is limited build out work, and thus “recurring” revenue is very small. Rather, both companies have, in real practice, “recurring” business models, as much as Intel and Microsoft did on the PC.

As for which is more speculative or risky, NVDA has been around for decades, NVDA has no real competition in GPUs. NVDA’s competition and risk are yet to be developed or marketed alternative technologies and methodologies, and nascent disruptive markets that may not pan out such as autonomous driving, AI, VR, AR, and continuing desire to play video games with better and better graphics cards. None of these are likely to dissipate and not come to fruition, but all will be subject to economic downturn, and NVDA has margins in the 25% range and ROIC that is near the top of any industry.

SHOP has not been around for decades, has multiple competitors that can pretty much do what SHOP does, and its valuation, based upon large growth rate, but entirely dependent upon a good retail market. SHOP is more vulnerable to an economic slow down than almost any high growth disruptive company that I follow.

Taken in a comparison, I know NVDA is going to be here 5 years from now, still competing at the top of the industry in multiple markets.

SHOP, I don’t know this. What I do know, is that SHOP has much more relative growth and upward surprise opportunity to adjust for its great risk to economic downturns.

Tinker

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Thanks Tinker, that’s an excellent alternate way of looking at it.
Saul

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Don’t get me wrong, my only two holdings for the past 6 months (other than VEEV that I sold buy more NVDA) are SHOP and NVDA

Tinker, did you mean that your entire portfolio consists of only 2 stocks???

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Gaucho,

Yes, just 2 stocks at the moment.

There are times when I intuitively feel something, I need to do it. This was one of those times. I do not recommend other people follow my example. But yes. I am debating tax issues at the moment before I might try to do something about it (but I don’t believe in selling something just because it has grown into too large a portion of my port - there is a time to sell, and selling due to success is not on my list of reasons to sell). But I’ve been too busy of late to even send new money to my account for the past few weeks, thus I do have non insubstantial cash laying around as well (but I haven’t felt anything that I need to buy right now either, so probably why it still just sits), but that is what I have had for the most part, year to date, and still have at present.

Look, I’ve been very successful over the last decade doing such stupid things in what I call a “conservatively aggressive” manner. My only regrets are when I did not do more. But it is only when I just am absolutely compelled to do so. SHOP and NVDA absolutely compelled me to hold them and I could not stand the thought of diluting what I “knew”. It is sort of entrepreneurially. You just see it and you have to do it.

There are some businesses that are not as risky as the conventional wisdom indicates, at least at some periods of time. Of course this “perception”, which in the end is all it is, is perception, can change over time.

It is the way I do things. But no, I will never free climb a mountain without safety rope, for those who are wondering. Not insane here :wink: I just “know” sometimes and act accordingly.

Tinker

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Tinker, a portfolio made up of only 2 stocks, that is rather impressive. I applaud your resolve, that takes some testicular fortitude i.e. balls of steel

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And, of course, many people would call Saul crazy for “only” having about a dozen +/-4 stocks.

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For a really long time I only had 1 stock… Netflix… like Tinker said, sometimes you just know. That was a wild ride to say the least.

MC

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The size of the portfolio is obviously another factor to consider in regard to the amount of/at risk with such a highly concentrated portfolio (stocks or other asset types).

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The size of the portfolio is obviously another factor to consider in regard to the amount of/at risk with such a highly concentrated portfolio (stocks or other asset types).

Excellent point, soccerboy.

Is Tinker trying to make us think he has huge sums of money invested in either or both of these stocks? Maybe he does, maybe he doesn’t. Maybe he wants to try to influence some on this board to his advantage(?) Who knows.

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Hi Tinker,

I like both companies, but just want to point out a couple of things. Unfortunately, they are opinions with few numbers available to back them up. However, I “feel” them perhaps as strongly as you “feel” NVDA will weather an economic downturn better than SHOP.

NVDA’s growth and industry position are easy to justify IMO. They make the best. They keep upping the ante. They took a big risk way back when, putting unprecedented amounts of processing power into GPU’s when at the time the only reasonable incentive (as far as I am aware) was mostly for upscale gaming programs. And they won. Not only is gaming huge and growing, but demand for computational and graphics power is growing due to sources that few envisioned 5 or 10 years ago. Bitcoin mining, cloud operations, big data, Windows 10, virtual reality, AI and complex advertising targeting schemes by some of the biggest firms on the planet. So I think that particular risk question has been answered and NVDA has “won” both for now and likely into the near- and mid-term future. Folks, we have a rarity in pc trends, we have a moat! Well done NVDA.

I know squat about bitcoin mining. The remaining factors appear to me to be very dependent on economic conditions, right down to pc sales, graphics card upgrades and yes, online retail shopping… So my remaining question is Shopify’s power in a downturn. If it’s a sharp downturn, yes, both companies will likely suffer along with the share price of most public companies. But I’m not sure that SHOP would suffer more than the average company or NVDA, regardless of the level of economic decline.

2 Separate Economies

One thing I haven’t read much about is the reason for the growth in so many upstart online businesses by so many individuals. But it would seem that one reasonable answer would be our current economic conditions. While corporate profits are soaring, individual incomes are stagnant and have been, arguably, for 20 years. Half our kids need help buying lunch at school. Health insurance and medical costs are bankrupting thousands daily. We’re living longer and record numbers of us are becoming dementia patients needing expensive, full-time supervised care, which is already breaking some state budgets (Hello, Florida, Goodbye, Florida.) College graduates aren’t finding jobs (and not paying back their student loans which now total more than all credit card debt.) Inflation is reportedly low, but my bride is reportedly spending considerably more each month for groceries and household supplies. Retailers are disappearing daily. In some areas, shopping malls sit empty.

In spite of all those headwinds for individuals’ economic status, one enabling gatherer of small retail shines. They do it best. They provide all the tools for the wee retailers. Advertising, collecting payment, advice, the whole enchilada, and for a fair but profitable price. People flock to join. Why is that?

My theory is that a very large part of the attraction is that the very fact that this is, a tough time for many working families. When a molecular biology graduate can’t find a job in her field, where is she going to go? Older Americans, many downsized out of jobs, have already hit the streets and many have accepted positions beneath their education. Friends with law degrees are now clerks at Home Depot. Nothing wrong with that, except that it’s such a huge trend, and many lesser-paying jobs are no longer available to folks new to the job market.with or without freshly-minted college degrees.

With so many forces behind the trend to online retailing and a culture seemingly determined to give even more power and profit to corporations at the expense of the individual, I think once again, folks, we’re witnessing Best of Breed in SHOP and once again, we have a moat.

My theory could be wrong too. But for these reasons, I expect Shopify to hold up better than the average corporation during any upcoming storm short of apocalypse, and better than all its direct competitors.

I don’t want to be a cheerleader for SHOP. I just “feel” the demand for its services. (Meanwhile, darn it, I wish I wouldn’t have sold NVDA.)

Dan

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Hi Dan -

I agree with your thesis that times are tough for many and, consequently, ever greater numbers of budding entrepreneurs seek to establish businesses of their own. I applaud their efforts. SHOP offers these aspirants simple access to markets/customers.

Here’s the thing…just how many customers are out there to purchase the goods being offered? I’ve watched the multi-decadal decline of median household wealth with deepening concern. Total S&P 500 revenues have been in decline for some time. Every business owner knows that the success of a business is dependent upon customers…paying customers. I live in a semi-rural area where the majority of the populace occupies the bottom half of the income scale. I see businesses open frequently, only to die shortly thereafter. Hard times affect consumerism.

SHOP’s success (if it is to be successful) is dependent on an ever greater number of businesses flourishing such that they become loyal SHOP subscribers and users of an ever greater array of merchant services. Frankly, I don’t see all that rosy a future.

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az5Speedy your ill mannered attack on Tinker is completely unjustified. I have known him on line for many years and have found him not only a good stock picker but honest in his reasons for supporting a purchase .
He is very articulate, (a good attribute for a lawyer) but I doubt if he is trying to convince you or even gives a darn whether you buy SHOP or NVDA.

Tinker is notorious for holding s few stocks. I hold a dozen or so, including SHOP and NVDA but the top 3 or 4 are over 3/4 of my portfolio. When I do get a winner I want it to be big enough to count. Count a lot.

Somebody living in the glass house of 3 followers should not cast figurative stones.

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certainly retailers have a high failure rate. But for every one that dies there is somebody else who is willing to take the chance. The lure of independence.
Restaurants are an example. Would anybody here invest in a start up restaurant? The failure rate is terribly high. But that does not keep newcomers from trying.

The decline of the middle class, aided and abetted by policies of both political parties, is indeed troubling. Some of it is secular and it will get worse.

But even if I were younger the full effect is beyond my investment horizon.

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<<<Is Tinker trying to make us think he has huge sums of money invested in either or both of these stocks? Maybe he does, maybe he doesn’t. Maybe he wants to try to influence some on this board to his advantage(?) Who knows.>>>

Tinfoil salesmen anyone? LOL.

I have a challenge. Someone, tell me, how I can influence people, by answering someone else’s question to me, regarding the number of stocks that I own, to my financial advantage.

I am serious. I am not smart enough to figure that one out. Tell me how so I can do so, please! Then I will start to do so, I guarantee you.

I will then further write a book on the “Art of tasteful tinfoil hat manipulation and profits from influence peddling on the Motley Fool.”

Tinker, wishing he had held only Netflix!

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az5Speedy your ill mannered attack on Tinker is completely unjustified. I have known him on line for many years and have found him not only a good stock picker but honest in his reasons for supporting a purchase .
He is very articulate, (a good attribute for a lawyer) but I doubt if he is trying to convince you or even gives a darn whether you buy SHOP or NVDA.

Whoa, Mauser, relax. I was not attacking anyone. I was simply following up on anther poster’s comment and suggesting, perhaps too obliquely, that caution should be exercised before buying a stock that someone else on this board owns just because they may own a large number of shares. The intent of my post was simply to suggest that blindly following someone else is not prudent. I believe Tinker himself included some caveats in his post. As for the number of followers I have, frankly, I could not care less…I’m on this board to improve my investing skills, not to try to get followers.

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Hi putnid,

I see businesses open frequently, only to die shortly thereafter. Hard times affect consumerism.

I don’t disagree, and that’s why my theory is just a theory. There are a lot of different forces acting here, and it’s hard to judge the effect of each.

My thinking is that without said consumer headwinds, I doubt SHOP would ever have been able to get to first base. If times were better, jobs easy to get and income rising, who wants the hassle of a new business? But somewhere along the continuum, you’re right. If current trends continue, we have to ask how bad things have to get for people to become less than successful at an online business and turn the tide for SHOP? Frankly, I don’t know. I hope the trends don’t continue.

I’ve been without an income for 17 years. I guess I should start an online business and find out. :slight_smile:

Dan

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Dan,

What you are talking about is not unique to today. When I got out of law school in the 90s, same things happening to molecular biologists and law graduates. Happens every generation. Some a degree harder than others, like those who came out after the housing crash of 2009. But each generation finds their way (with the exception of the Great Depression as that was a historical world event that wound up in W.W. II, far beyond anything anyone posting on this board has ever been through). Your bride will find her way, as will the law graduate (and frankly not all law graduates have the aptitude to use their law degrees - in one of my cases, opposing party is a former lawyer, and he couldn’t hack it, so he moved on to other things. For him it is elementary school teaching. For others it could be Shopify business, who knows).

SHOP is like the new EBay, and like with EBay, the real money was in the more successful vendors, not the marginal housewife selling nick nacks.

This is why I don’t ponder the economy. I also don’t ponder P/E, P/S, etc., these multiples will change over time and frankly are not very relevant to a long term perspective.

Instead I look at marketcap relative to CAP and TAM and leave it at that. And just invest money each month. My goal has been to take the stress out of it all and just systemize it so one can live their life without worrying about such things.

My dilemma is that as I look for the few companies I want to invest in long term, I keep finding these opportunities that I’m willing to go with such a concentrated portfolio. So be it I guess. I am looking for #3.

There is no doubt that your stock portfolio will fall at some point in time. But from what point, how far, and will it come back? Successful investors understand this, don’t panic, and that is why I think for most people don’t over analyze, and dollar cost average into great companies with long term perspective and don’t fret things you cannot control.

As HeartMD demonstrated with Netflix, it takes a lot to be a successful investor, even in a company as successful and world beating as Netflix. Overthinking will destroy your investment. Fretting will destroy it. Market timing will destroy your it.

For me, I have my own very high standards, and thus I don’t own many, and I do have a talent and intuition in regard.

Presently, I am not compelled to buy anything at all, even with dollar cost averaging. Sure, I am swamped running my own business, but I’m sure I could free up some time to ship the money. I’ll get back around to it.

Tinker

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I think starting a business on the web enhances a start up’s chance of being successful. It involves much less in start up capital and limits expenses initially. I know of one man who started up a mail order business and eventually had some brick and mortar stores. He eventually sold this company to a larger enterprise and in doing so had to execute a non-compete for mail order and bricks and mortar.
So he went online and built a new company doing the same thing starting out of his basement. He recently sold this business for 190 M. Being online 1st cuts costs and expands your geographical reach.

Rob

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