Comparative metrics: Fast growing firms w/o EPS

Investment Analysis Clubs Saul’s Investing Discussions
#1

Over the last 2 years, many people here have shifted their holdings to fast growing tech companies characterized by…

  1. Fast revenue growth
  2. Lack of positive EPS
  3. Lots of recurring revenue
  4. Light capital business model

These companies are alluring because of their fast growth and potential for very strong future EPS results and growth. Clearly, people invest in them because they hope to realize appreciation in the stock price. One challenge in analyzing these companies is the lack or EPS and adjusted EPS making some commonly used valuation metrics (EPS growth, P/E, 1YRPEG) useless. There are a number of these companies so how do we decide which are worthy of our investment dollars and how do we rank them against each other so we can make prudent allocation decisions? This last question prompted me to look more closely at a handful of these companies. I have tabulated some results for a set of these companies using their reported financial filings. The purpose to rank these companies to answer the question of how much, if any, I should allocate to each company. The companies that I chose to look at include SHOP, TLND, HUBS, HDP, MULE, NEWR, TWLO, and SPLK. I may expand the list to include other companies that are fast growing, have business models with low CapEx requirements, and are not yet profitable or barely so.


     | TTM REV | MARKET CAP | CASH-DEBT | EV/Sales | 1YR REV GR | 1YRREC REV GR | CFFO (last Q) | CFFO (TTM) | Customers | Customer growth | Deferred Rev | Shares Out | Price  | Stock Comp (TTM) | Dilution TTM | Updated Q | Notes                                                                                 
SHOP |    $444 |     $8,070 |    $395.7 |     17.3 |        85% |           65% |          $4.0 |      $17.4 | 375000+   |             45% |            1 |     90.243 | $89.42 |            $24.9 |         0.3% | 3/31/17   |                                                                                       
TLND |    $117 |     $1,108 |     $95.1 |      8.7 |        42% |           42% |          $2.5 |       $3.7 |       269 |             60% |           26 |     28.688 | $38.63 |             $2.5 |         0.2% | 3/31/17   | Customer # is customers with >$100K subscr rev per year; have more than 1500 customers
HUBS |    $294 |     $2,834 |    $160.6 |      9.1 |        45% |           48% |         $19.1 |      $35.3 |     25775 |             28% |         25.4 |       38.5 | $73.60 |            $35.7 |         1.3% | 3/31/17   | Deferred revenue on BS growing                                                        
HDP  |    $199 |       $776 |     $83.4 |      3.5 |        41% |           53% |         -$9.0 |     -$54.8 |           |                 |        198.2 |     61.848 | $12.54 |            $92.8 |        12.0% | 3/31/17   | Deferred revenue on BS growing                                                        
MULE |    $210 |     $3,340 |    $339.6 |     14.3 |        62% |           67% |         -$0.2 |      -$2.9 |      1131 |             35% |        131.3 |        128 | $26.09 |             $8.8 |         0.3% | 3/31/17   |                                                                                       
NEWR |    $263 |     $2,495 |    $206.4 |      8.7 |        46% |               |               |      $18.9 |     15216 |             13% |         72.4 |         53 | $47.08 |            $31.9 |         1.3% | 3/31/17   |                                                                                       
TWLO |    $305 |     $2,740 |    $276.2 |      8.1 |        58% |           72% |          $2.4 |       $6.5 |     40696 |             42% |         11.1 |       88.6 | $30.93 |            $30.6 |         1.1% | 3/31/17   |                                                                                       
SPLK |  $1,192 |     $8,413 |    $987.6 |      6.2 |        38% |           29% |         $41.4 |     $207.5 | 13000+    |             17% |        469.1 |    137.785 | $61.06 |           $345.8 |         4.1% | 4/30/2017 | Transitioning to Cloud from On-premises; revenue growth rates will likely increase

There’s a lot of information in the table above and I have so far found it useful because for me there are a bunch of considerations in deciding which company is a good investment, how much I want to invest relative to the others, and what risks do I need to consider. Let’s discuss some of the companies and their associated metrics.

SHOP is an $8B market cap company and it has the highest revenue growth on the list. If you look deeper into the growth (not in the table above), you will see that revenue growth is decelerating slowly. I think that has a lot to do with the large number of merchants who are flocking to SHOP. They reported more than 375,000 at the end of Q4 2016. I couldn’t find the figure for Q1 2017 but I think they said in the prepared remarks that they added the most ever Q1 meaning that they should be at more than 400,000 merchants given them a y/y customer addition rate of 45%! Also, the huge number of customers reduces the financial risk of losing any one customer. The share dilution due to stock based comp was a lot lower than I thought when you compare the expense relative to the company’s market cap. The only negative is the high EV to sales ratio of 17.3. However, if the growth continues strong this figure will come down quickly.

MULE is the second fastest revenue grower on the list. After doing this exercise, I think that I will add to my MULE position. Here are some of the reasons why. They are at/near cash flow breakeven. The recurring revenue is growing even faster than SHOP’s; this was a surprise to me. Stock dilution is not a problem. They have a large amount of deferred revenue which makes their high EV to sales ratio lower than it appears; total deferred revenue is about 2/3s of their TTM revenue. They have a relatively small number of customers but many of their customers are large enterprises and the count is growing at 35% y/y. Also, if you dig further into their financial reports (not in the above table) you will see that some of their metrics are very good: revenue per customer is growing steadily every sequential quarter ($105K, $115K, $125K, $136K, $143K, $152K for the last 6 sequential quarters) and dollar based net retention rate has been above 110% for the past 8 quarters. Based on these metrics the only negative I see is the relatively high EV to sale ratio of 14.3 but the deferred revenue makes that seem not so bad.

TWLO was another surprise. The growth in revenue and recurring revenue was very high. They are adding customers very rapidly as shown by the 42% y/y increase in the number of customers. They may have lost some Uber business but they added >4000 new customer in just the last quarter. Their operations are cash flow positive. The EV to sales ratio of 8.1 is about in the middle of the pack for the group. I currently don’t own TWLO shares but will now seriously consider buying back in.

TLND is growing revenue and recurring revenue at 42%. Its adding new high value customers at a 60% rate. TLND actually has more than 1500 customers but they report the customers that spend more than $100K per year. The stock based comp is super low. I should say it was super low; if you look at their guidance they included guidance for stock based comp for FY2017; that figure is $10M up from $2.5M over the past 12 months. I would guess that the increase may have something to do to moving their operations and headquarters from France to Silicon Valley where you need to hand out stock based comp to attract talent. Even at $10M in stock comp in 2017, they will be in line or on the low end of the companies on this list.

HDP has a couple of issues. Their CFFO is very negative still; it is improving but the company is still burning a ton of cash. The other problem is the stock based compensation. It was $92.8M over the past 12 months. This is only a $776 market cap company so the dilution was a whopping 12.3%! Not good. Sure the deferred revenue looks great and the EV to sales ratio is only 3.5. I’m now considering joining Saul in his decision to sell.

HUBS has a healthy revenue growth rate of 45% and a recurring revenue growth rate of 48%. The customer count grew by only 28% over the past year; digging deeper I noticed that the average subscription revenue per customer grew by only 10% y/y so I’m not sure how they got to 48% recurring revenue growth. Stock based comp looks reasonable and they are cash flow positive. The EV to sales ratio of 9.1 is the 3rd higher in the group but close to the average. Overall (based on these financial metrics), I would say it looks like a good business.

NEWR is another fast grower with revenue growing at 46%. I didn’t find any recurring revenue breakout so I assume most of the revenue is recurring especially since they only grew their customer count by 13% over the past year……that growth must be coming from somewhere. Also, deferred revenue is high compared to their overall reported revenue ($72.4M deferred versus $263M reported over the past year) which is another reason to believe that most of their revenue is recurring. They are cash flow positive and have an average (for this group) EV to sales ratio of 8.7.

SPLK is harder to assess given their transition from on-premises to cloud offerings. This may make their growth of 38% and 29% for revenue and recurring revenue, respectively, appear smaller than it actually is. The high dilution of 4.1% over the past year stands out, but it is not as absurdly high as HDP’s dilution. The EV to sales ratio is 6.2 which is on the low end for the group. The CFFO is very healthy at $207.5M over the past 12 months. SPLK is a bit more established than many of the others in the group. Customer addition growth is relatively low at 17% and I presume that spend per customer is a focus but I need to dig into this company a bit deeper.

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#2

A fairly famous remark from long-time value investor Martin Whitman:

“Earnings are vastly overrated. Look at the title of my new book, Value Investing: A Balanced Approach (John Wiley & Sons). No smart businessman treats one accounting number as more important than another. They are all part of the whole. The goal of any business person is to create wealth, and except on Wall Street, profits are viewed as the least desirable way to create wealth because of the income-tax disadvantage. It’s a lot easier to look at the quantity and quality of resources a company has than to forecast its earnings. If you have good management, it will convert those resources into something of value.”

5 Likes
#3

What about companies in the next stage - same capital characteristics, proven growth, but turning a profit, or even a reliable profit?

Are they priced out of the stratosphere, or not always?

#4

<<<"The goal of any business person is to create wealth, and except on Wall Street, profits are viewed as the least desirable way to create wealth because of the income-tax disadvantage. It’s a lot easier to look at the quantity and quality of resources a company has than to forecast its earnings. If you have good management, it will convert those resources into something of value.”>>>

Shorten it and it will become the motto of every true entrepreneur on the planet.

The create of wealth does not equate to quarterly profits. Yet that is all we hear from the conventional wisdom.

This said, the best wealth creation almost always comes from businesses that are run so well, or that have such competitive advantages, that not only are they creating wealth they are able to create hordes of free cash flow to boot. These are even rarer.

But the world is full of such examples. Sure, toss out Amazon, but what about Salesforce? The profitless wonder of the cloud, as an example.

The whole key is to figure out when wealth is actually being created and not destroyed. The latter type of companies create hope, and the former wealth.

But clear enough, I am tired of hearing just about “when will they make a profit?” I am far more interested in their market cap as it is weighed against their CAP and TAM. If they have a strong CAP, they will be able to turn on free cash flow (sometimes even before they really want to), and with a strong cap, if they have a big TAM, that is an incredible combination if you combine that with smart management.

It is not rocket science after all (unlike biotech investing).

Tinker

4 Likes
#5

Nice work, Chris!

Seems like you could add a couple of columns (Price & Earnings), do a WAG projection out 5 years for sales and earnings, and based on an assumed P/E, have a pretty good estimate of which were worth what now. :slight_smile:

I know, it’s those WAG’s that are hard, but we’re doing some form of WAGS now no matter how we value these little firecrackers, even if it’s just using our “intuition.” Methinks that assumes too much confidence in our intuition, we need some numbers. :slight_smile:

You have the financials so extend the trend, my friend. (I would - I have(!) except for NEWR - but this is your show and I think you’re on a roll.)

Dan

Hear that chant? “Do it, Chris!” “Do it, Chris!” “Extend the trend!”

1 Like
#6

This said, the best wealth creation almost always comes from businesses that are run so well, or that have such competitive advantages, that not only are they creating wealth they are able to create hordes of free cash flow to boot. These are even rarer.

It has been the “conventional wisdom” on Wall Street for decades that oil companies are better evaluated based on cash flow than on (quarterly) earnings. I would think this is true for any outfit based on long drawn-out project development which would include some drug companies.

The problem is not “earnings” but their quarterly reporting. When you have long term development that uses cash but does not produce current earnings, quarterly reports are misleading. GAAP also contributes to misleading reporting which is one reason Saul uses “adjusted earnings” and Warren Buffett uses “house earnings” and “book value” to measure his properties.

Traditional security analysis taught by Graham and Dodd applies to steady state enterprises, not the kind of outfit that is generally discussed here.

One metric I like is “price to sales.” While acceptable ratios differ between industry sectors it is very useful for comparing businesses in the same sector.

Denny Schlesinger

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#7

Seems like you could add a couple of columns (Price & Earnings), do a WAG projection out 5 years for sales and earnings, and based on an assumed P/E, have a pretty good estimate of which were worth what now. :slight_smile:

I know, it’s those WAG’s that are hard, but we’re doing some form of WAGS now no matter how we value these little firecrackers, even if it’s just using our “intuition.” Methinks that assumes too much confidence in our intuition, we need some numbers. :slight_smile:

You have the financials so extend the trend, my friend. (I would - I have(!) except for NEWR - but this is your show and I think you’re on a roll.)

I put this together to help me make some stock selection decisions and to provide myself some guidance on how to best allocate among these fast growing tech companies. My work thus far has already made it clear that I need to make some changes to my portfolio which I plan to start when the market opens.

I was hoping for a good discussion and maybe some additional efforts by members of this board. If you are interested in doing additional analysis send me a private message and I will be happy to share my spreadsheets with you.

Chris

1 Like
#8

Nice work! Remember, these will be the fastest to fall if the market has a real correction. Just sayin’

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#9

<<<Nice work! Remember, these will be the fastest to fall if the market has a real correction. Just sayin’>>>

And the fastest to rise as well if they have a quality business. In fact, it is the best companies, and the best companies tend to be the highest valued, that recover and come back stronger after market crashes.

Tinker

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#10

The one company I would add to this list would be VEEV as I think they have got into the Pharma field at the right time and they will do well given that there is a lot of opp in the pharma sector and they already have a wedge into other peripheral sectors where regulations play a big role

Look it up/

#11

Thinking more about these metrics, I should add that the dilution is not the dilution based on share number. The way I’ve calculated the dilution is SBC (as expensed by the company divided by the current market cap of the company. This figure may not be entirely accurate especially if the stock price rises or falls significantly. I also did not adjust for any dilution (if there are any) due to secondary offerings. To get a more accurate idea of how much a company is diluting due to SBC, I will need to due the following calculation: number of new shares issued for SBC divided by total shares outstanding before these new issuances of shares.

For example, in the past year SHOP stock showed significant appreciation so the 0.3% dilution is an underestimate. SHOP’s dilution from SBC will be significantly below what I would be willing to accept. As long as the dilution is below 3% per year, I don’t worry about it. The fast the company is growing the more dilution would be tolerable.

SPLK’s stock price is similar today than it was a year ago so the estimate in my metrics table should be fairly accurate. A 4% dilution for a company that’s already as established as SPLK is starts to annoy me as a shareholder. I would hope that the company limit future SBC.

Chris

2 Likes
#12

Chris:

I am a bit surprised that this post is not getting enormous follow-on posts especially since the very stocks that make up the large portion of the portfolios here are negative or near negative earnings.

One would think that an attempt to tweeze out some criteria for buying/selling/ignoring would be very welcomed with such large risks taken by investors.

Your other thread that dovetails into this discussion was here:

http://discussion.fool.com/build-it-they-will-come-vs-complex-in…

Just a few considerations in your categorization of “scalability”:

  1. Just because a company like SHOP doubles its customer base, does not mean it will ever make a profit. Is having a million customers paying $1 annually better than 1 locked in customer paying $1 million? There is no consideration to what a customer brings in average revenue.

  2. Your analysis does not account for a large strategy used by technology companies of “land and grab/expand”. That is, some of these companies may land a customer but markedly expand the project and revenue in subsequent quarters.

  3. Your analysis doesn’t account for lock-in if it only considers scalability. Maybe a company like MULE takes longer with integration but the huge benefits to the customer of scalability are a massive lock-in:

http://discussion.fool.com/mule-must-custom-distribute-every-pro…

We provide a disruptive platform to help companies create an application network, in which they can quickly discover, reuse and compose application components to deliver new and enhanced services. By using an application network, companies can compose new services in days or weeks, instead of the months or years typically required with custom integration code.

  1. Your analysis suggests a decelerating revenue growth rate may be time to exit the stock. But all of these companies will experience that at some point…happened to AMZN multiple times in past…what if you had sold the stock back then?

  2. The ability to “scale” has not seemed to guarantee success. Take a look at these two stock charts from “scalable” companies:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?s…

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?s…

Both “scale” but one has been a dud. Both are early in their adoption yet with massive growth rates…TWLO had 60% YoY revenue growth rate…but that chart says it all from an investor perspective.

I do like that you have started on this exercise, because it may actually yield some valuable “actionable intelligence”.

But IMO, it needs some serious refining, rules, back testing because as it now sits, it may be less predictive than one thinks and subject to confirmation bias.

So maybe this is a call to arms to the rest of us on these boards to cloud source ideas that could make your vision of an investment framework in these high tech (no/low earnings) companies more understandable.

Carry on!

13 Likes
#13

Duma,

I am a bit surprised that this post is not getting enormous follow-on posts especially since the very stocks that make up the large portion of the portfolios here are negative or near negative earnings. One would think that an attempt to tweeze out some criteria for buying/selling/ignoring would be very welcomed with such large risks taken by investors.

Yes, my intent in post was to trigger a discussion.

Just a few considerations in your categorization of “scalability”:

1) Just because a company like SHOP doubles its customer base, does not mean it will ever make a profit. Is having a million customers paying $1 annually better than 1 locked in customer paying $1 million? There is no consideration to what a customer brings in average revenue.

Yeah, I don’t think there’s an end all be all, but most of these companies are trying to increase revenue, grow their user base, and expand the benefits to their target customer to increase value and erect larger barriers to entry. Many of these companies could show profits today if they chose to cut back on spending and limit their rate of expansion. What I like about SHOP is the easy with which they can grow their customer base…it’s almost as if they don’t even need to try and it will keep growing. I think SQ is like that too; the customers are so delighted by the benefits of using the Square or Shopify offering that they recommend it to others. Square and Shopify view themselves as partners of their customers and are trying to enhance their products and services to help their customers grow their business. Not only does this add tremendous value for the customers but it also creates a sense of loyalty which makes their offering that much more sticky.

2) Your analysis does not account for a large strategy used by technology companies of “land and grab/expand”. That is, some of these companies may land a customer but markedly expand the project and revenue in subsequent quarters.

Not specifically, but it doesn’t necessary preclude it either. TNLD is selling to enterprise customers which gives them an opportunity to land and expand. However, unlike NEWR, TLND has been able to show excellent growth in customer acquisition. Maybe the TLND service is easier to sell, is less complex to sell, is less complex to implement, or provides better value to the customers than some of the other companies. Whatever the reason, the growth is continuing as is demonstrated in their results.

3) Your analysis doesn’t account for lock-in if it only considers scalability. Maybe a company like MULE takes longer with integration but the huge benefits to the customer of scalability are a massive lock-in:

http://discussion.fool.com/mule-must-custom-distribute-every-pro……

We provide a disruptive platform to help companies create an application network, in which they can quickly discover, reuse and compose application components to deliver new and enhanced services. By using an application network, companies can compose new services in days or weeks, instead of the months or years typically required with custom integration code.

I wouldn’t suggest that only scalability should be considered. However, I view scalability as a very important factor to consider and I might even opt out of an investment if I think it’s not scalable. But if scalability is there then I would still want to make sure that the investment meets other criteria as well. Regarding MULE, the growth is still good for now but the sales cycle and complexity make me nervous about the longer run future growth.

4) Your analysis suggests a decelerating revenue growth rate may be time to exit the stock. But all of these companies will experience that at some point…happened to AMZN multiple times in past…what if you had sold the stock back then?

Decelerating revenue is a yellow flag and would cause me to dig deeper. I like to know the cause of declaration, the rate of deceleration, and the remaining growth rate. Those are all things to consider. In addition, I look out for special circumstances that might be temporary. For example, TWLO and the Uber business reduction will probably be a temporary blip in their longer term growth, and to make a sell decision based on such a temporary factor might lead one to miss out on a longer term growth story. Now I think AMZN is almost always a bad example for trying to make a point. AMZN is so unique and investors’ willingness to overlook no earnings for 20+ years is probably not seen with any other company in history. Someone would likely go broke giving all their investments a pass like investors have done with AMZN. Another point: I’m not so worried about missing out on the next AMZN. It’s ok to “miss out” as there are many other investments that will do well.

5) The ability to “scale” has not seemed to guarantee success. Take a look at these two stock charts from “scalable” companies:

Both “scale” but one has been a dud. Both are early in their adoption yet with massive growth rates…TWLO had 60% YoY revenue growth rate…but that chart says it all from an investor perspective.

I would be cautious on trying to use the stock price to determine if an investment has been a dud or not. The timeframe shown can also lead to a faulty conclusion. SHOP has shown great growth on the business metrics and great growth in the stock price. TWLO has also shown great growth on the business metrics but to say that it’s been a dud on the stock price is not exactly true. TWLO went public in 2016 at $15 so it’s close to a double in about a year. Both of these companies are still early in their growth so the jury is still out on how well they will ultimately do.

Thanks for your comments and hopefully some others will also share their thoughts on how they decide if and how much to invest in these high growth companies…and which ones they avoid and why.

Chris

9 Likes
#14

<>
I think I know what you mean but stock price is all I use. And the time frame is from the time you bought it to the present. Some would say until you sold it but I think paper profits are real since you can borrow money based on them.

For software stocks in particular and some others the bulk of costs are up front. As Rogers and others have pointed out , in the main stream sales are made mostly by one customer referring(or copying ) another .Which costs the company little compared to the salespersons they needed early on.

<<It’s ok to “miss out” as there are many other investments that will do well.>>
Can’t argue with that. What counts is what you buy ,not what you missed buying.

One thing I stress intellectually but sometimes have trouble following in the real world is that the outlook for a company and for the stock of the company are two different things. And that you can pay too much for a stock no matter how bright the prospects.
Especially since these high growth stocks are seldom available at bargain prices. Today, in the small universe of growth stocks I follow ,I can not think of one available at a fire sale clearance price. Since we are in a tech Bull Market probably only a bogus FUD event will make any of them cheap.

1 Like
#15

I just did a breakdown of Shopify’s financials the other day. Before doing this I thought it was overvalued. After doing it I bought shares :slight_smile:

Background: I’ve run major marketing programs for a fast-growing startup with revenue in the $100m range, I’ve worked around tech companies for a long time, and I’m starting a business now based on my marketing knowledge that seems to be doing well. I know others who are starting tech businesses, ecommerce businesses, and Shopify businesses.

So naturally I want to know if their marketing is working. Here’s a summary of what I found.

Last year Shopify spent $129m on customer acquisition. Their gross profits (after the cost of services they’re reselling) were $209m, an increase of $96m. Based on their past history this is too conservative, as some of the new subscribers didn’t fully contribute to last year’s revenue.

Another major worry for me was that the growth isn’t solid. Merchants could go out of business or outgrow Shopify if they’re too successful. But their subscription retention rate is over 100% (revenue from individual subscribers, on average, grows over time rather than declining). For lack of a deeper investigation I’m comfortable for now to say that $100 in subscription revenue today will add $100 a year for the foreseeable future.

So for $129m (one-time) they bought $96m/year in gross profits. R&D costs are about 35% of gross profits and general and admin costs are 20% of gross profits. Excluding R&D costs and giving them a slight increase for new subscribers that arrived late in the year, they would have around $85m in new net profits. This means that anything they invest in marketing adds around 66% of that amount to their annual profits.

Based on that analysis they could simply take their net profit excluding marketing, which would likely be around $110m in 2017 if they did no marketing at all, and invest that in more marketing. That would increase the net profits by about 66% the next year allowing them to do more of the same.

That sounds pretty good. There are a few other things to consider:

  • Share dilution would be an issue. However they currently have a high valuation which means they wouldn’t need to “spend” as many shares. It seems that they can invest any money raised in a profitable way so as long as the management is smart this isn’t necessarily a major problem.

  • R&D costs as a percentage of gross profit would have to fall. Unlike companies in fast-changing technologies I don’t really see them having to throw out a lot of what they built after a few years. I’ve written software exactly like theirs and have seen it run just fine for 10+ years :slight_smile: Their annual report mentions that they depreciate internal software development over 3 years which is probably a bit aggressive. However this could add to dilution if they need to raise more capital for new development. Higher share prices minimize this impact.

  • They have several hundred million dollars in liquid assets which could address the above for the next few years and/or give them additional capital to invest in growth.

  • This does not account for increasing revenue from the existing groups of subscribers, or the possibility of adding new services that increase the value of each merchant on the platform.

  • Hopefully at some point they become an established platform where the number of merchants attracts new add-ons/services and the range of add-ons/services attract new merchants.

You can make a lot more tweaks to the model but it’s a start for looking at companies like this. If they execute well for the next few years it could well get to a point where it’s virtually impossible to have a catastrophic loss – a business with consistent cashflow always has value.

Based on a simple continuation of the trend outlined here, a P/E ratio of 20 in 5 years from now would give a gain of 50 - 150% and a P/E ratio of 10 in 10 years from now would give a gain of 570% - 660%.

Now I’d love to see the price drop for a better buying point!

23 Likes
#16

<<<They have several hundred million dollars in liquid assets which could address the above for the next few years and/or give them additional capital to invest in growth.>>>

They have nearly a billion in cash now after their recent secondary.

<<<Now I’d love to see the price drop for a better buying point!>>>

It just did. But good luck w better buying points. On a market crash SHOP may fall like everyone else, and a year ago SHOP fell as well (that is about when I bought SHOP). It was considered expensive even back then, in the $20s and $30s, I remember that quite well. It is always going to be considered expensive, and it will never have a P/E of 10, at least not in the foreseeable future.

SHOP has not lived through a recession yet, but then again you can say that about a lot of companies.

Every few years, like with the great storms that come in every few decades, there is a big market crash. The last such one was in 2009. The SaaS stocks like SHOP appear to have had a micro crash in the early to middle part of last year, so if you are patient you may happen across such an event again. I just don’t have such patience so I just keep adding every month.

Tinker

3 Likes
#17

<<>>

I was just going off of their year-end report for the full details. Surely the numbers have gotten better since then :slight_smile:

Another comment on the original post: I wouldn’t exactly call these light capital businesses. Especially if you try to run one of them… I’ve looked at the business model a lot of times but never got into it, and I don’t envy them!

You can look at a retailer and it seems like they’re in a hard spot because they have to hold a bunch of inventory for 90 or 180 days before they can return their cash (with or without a profit). Then look at how a software subscription business works.

First they spend months/years and millions of dollars to build the software. Then they spend months/years and millions of dollars to sell it. Once they do, they get a trickle of revenue. Eventually after 2 - 3 years (hope the customers stick around that long!) they’ve paid back their customer acquisition cost. If they’re lucky enough to reach a big enough scale that margin pays back their original development cost (which is now several years in the past) and leaves a bit of profit. And then if they’re in a fast-moving industry their tech becomes obsolete and they start over. There is a famous conference talk shared between founders in the industry titled “The Long, Slow SaaS Ramp of Death”. The name says it all.

Most of these names will have gotten their main business past that point. But they still need ongoing investment. In my analysis of Shopify above, their R&D costs (likely some combination of scaling their core business and developing new offerings; both of which are needed for growth) and Sales & Marketing costs are the main thing holding back their growth – and they will need a lot of capital compared to their current revenue to keep growing.

Compared to this business model, there’s not much that soaks up more capital other than railroads and airlines :slight_smile:

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#18

I just did a breakdown of Shopify’s financials the other day. Before doing this I thought it was overvalued. After doing it I bought shares

Hi compounder,
Welcome to the board and thanks for the nice analysis.
Saul

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