My thoughts on Shopify. Again… I published parts of this before but feel obliged to republish it as people I care about are still riding this speculation (see below).
First, here’s why I got out of Shopify: There were several issues. Shopify was having small drops in growth rate every quarter, as would be expected with size, while Square was having increases in growth rate in each of those quarters (in pretty much the same or closely similar fields). Then, the quarter that I, and others, exited, the economy posted a huge rise in GDP and consumer spending, and instead of Shopify responding, they had a huge drop in growth rate. In addition it looked as if their basic small business customers had reached saturation and they were relying on Shopify Pro for future growth.
In fact, I found my sell-out in my August monthly summary. Here’s what I wrote at the time:
I had reduced my Shopify position gradually over a couple of months but it was still one of my major positions. However, in early August I sold out of it in shock when their rate of revenue growth, which had been falling every quarter, precipitously fell in a quarter when the economy was very strong and in which Square, in a market quite similar, had huge results, following on top of increasing rates of growth in all the quarters where Shopify had falling rates of growth. My average sale price for Shopify was about $145, about 537% of my initial purchase price which was $27, two years before.
Here’s the way I see it:
In the Mar 2018 quarter the rate of growth dropped 7 points from 75% the year before to 68%. 7/75 is 9% so the rate of growing dropped 9%.
In the Jun 2018 quarter the rate of growth dropped 13 points from 75% the year before to 62%. 13/75 is 17% so the rate of growing dropped 17%.
That’s when I got out. Since then, the rate of fall, instead of slowing down as the rate of growth decreased (as you would expect), has continued to accelerate each quarter:
In the Sep 2018 quarter the rate of growth dropped 14 points from 72% to 58%. 14/72 is 19% so the rate of growing dropped 19%.
In the Dec 2018 quarter the rate of growth dropped 17 points from 71% to 54%. 17/71 is 24% so the rate of growing dropped 24%.
In the Mar 2019 quarter the rate of growth dropped 18 points from 68% to 50%. 18/68 is 26.5% so the rate of growing dropped 26.5%.
Note that as the actual rate of growth decreased, the percent of drop in that rate of growth has increased every quarter, instead of falling as you would expect. That’s eye-catching, enormous and consistent. That’s five consecutive quarters with the rate of growth dropping more yoy sequentially.
The last three quarters their rate of drop was 14 points, 17 points and 18 points, with no sign that the rate of fall of growth rate is slowing down. But lets assume the next three quarters fall just 17, 16 and 15 points. That would give them growth rates of 45%, 42% and 39%.
Their TTM adjusted EPS is 41 cents and they are selling at $259, which gives them a PE ratio of… Let’s figure here… 259 divided by 0.41 = 632. Yep, a PE of 632!!! Will that tolerate a growth rate in the 30’s, and falling rapidly?
What’s holding Shopify up is speculation about cannabis, not anything that is currently improving. Shopify seems to me to have saturated its market universe of low-hanging fruit of mini-companies, and while its Shopify Pro is gaining, the vast majority of major enterprises are simply not going to hire Shopify to set up their website (and it would probably be thought of as insulting to most large enterprises to even consider hiring a company that specializes in websites for mini-businesses).
Look, a few weeks ago, while riding the NYC subway I was in a subway car with a string of separate subway ads from Shopify saying “Let us start you a business. Turn your mom’s famous apple pie recipe really famous,” and a dozen similar “Let us start you a business” ads, like “Remember that great idea you had last week? Let us start you a business”.
If I wasn’t out of Shopify already I would have sold out then. That said to me they are no longer finding enough self-onboarding little companies, and their move to big companies isn’t doing it. It looks to me almost farcical. Are they going to move a $28 billion market cap company 40% or 50% with “Let us start you a business” ???
In just a few weeks I saw three subway cars with these ads covering an entire advertising side, in my relatively limited subway riding. Is this what they are spending their S&M dollars on? Is this the move towards Shopify Plus, and the dependence on large enterprises that the Shopify holders are counting on?
It seems like desperation to me. If I was a C-level executive for a major enterprise and saw one of those ads in the subway, would that make me think Shopify was for my company? No Way! It sounds like a company for absolute beginners with no current revenue at all.
Best,
Saul
