P/S and MOJO Risk

I have read the many posts on SHOP the past couple days trying to make sense of the justification for the short attack and what it means to the SHOP growth story.

Mauser has done a very nice job reviewing Citron’s recent history and their lack of effectiveness driving down numerous stocks.

It shouldn’t come as a surprise that Citron would attack a stock with a P/S of over 20. These stocks are easier targets IMO because the logic to invest in them becomes rather contorted and strained purely from a valuation perspective.

I also sold out of SHOP a couple weeks ago as posted on the NPI and the reasons were valuation and the enormous challenge to see continued gains in SHOP’s stock after what was a 4 multiple in about a year.

I also often use historical P/S to gauge when a stock might be a good buy or in the case of SHOP a good sale. History is still a valuable asset to assist one in how to consider one’s investments both from a particular stock perspective and from a similar class perspective.

Let’s briefly consider these two:

  1. If you look at the P/S of SHOP this past year (Morningstar gives you historical values here:


Click on the valuation tab and scroll down to the chart for P/S. In 2016, it was 10! In 2017 it rose to around 22! That is historically, for this stock, twice the P/S as previous. I recognize that this is a recent IPO so we don’t have a great deal of data to consider, but I have used this methodology numerous times to invest in, and get out of, tech stocks when they are at the extremes of values. Extremes are the easier to act on IMO.

You can check your high growth stocks’ P/S valuation history quite easily at this site. I fully recognize that this is a very crude assessment (doesn’t take into account growth rates, margins, debt, etc.) but it is very fast and can identify extremes quickly.

Another example might be NVDA (which I still own, one can again see why Citron tried to attack it)…historically high P/S. Same could be said of VEEV.

But this is NOT to say that just because you own such a stock that it cannot continue to rise…rather that the pressure against the stock to rise further can be intense…such that any little earnings slip results in a trashing of the stock…this is why Citron attacks the nosebleed stocks…they are ripe for plucking.

There are numerous examples in recent past of similar extreme high P/S stocks like LNKD and TWTR that dropped precipitously.

  1. If you contemplate similar asset class historical records, one needn’t go much further than to the 2000 bubble when tech stocks like MSFT traded at P/S of 35 and CSCO traded at 37!


It took a VERY long time to recover money that was invested at that high valuation.

When investors pay an irrational P/S ratio, they pay for irrational growth
When investors buy stocks with high P/S ratios, those stocks need to grow revenue at least 30%-40% on a yearly basis for many years into the future. This is because investors are paying a big premium today for growth that is expected to happen in the future.

But, with any deviation from future growth expectations, the premium paid today may no longer be deserved. As a result, and because an irrationally high P/S ratio cannot be maintained by an increase in revenue growth, the stock is likely to collapse.

One of the very few stocks that I have seen maintain a very high P/S is FB…not even GOOG or AAPL has had such nosebleed levels. So you can argue that SHOP is the equivalent of the FB anomaly but IMO, this contorted logic is what gets people in trouble…arguing by exception.

SHOP cannot report lower revenue growth in near future or the stock gets pummeled IMO.

Lastly, there are numerous studies such as this one that point to the risk of investing in high P/S stocks:


You can see that stocks in the highest quintile of P/S are usually the worst investment performers.

Now maybe you hold the exception to this rule…the FB of all stocks…but from a probability perspective, would you really want to have 10% or greater of your portfolio against these odds??

As some of you know at the NPI, we drill down to the detail of investment opportunities in stocks as relates to their moats, TAM, substitution threats, buyer power, sustainable power, risk of competition, etc.

But it is VERY important to keep these metrics separate from the stock valuation metric…something I have coined the TALC/SALC disconnect.

In the case of SHOP, it seemed reasonable to me that there was a disconnect favoring more extreme SALC (stock adoption getting ahead of the technology adoption). Ignoring historically extreme high P/S on a per stock or per class basis, will be fraught with unusual risk IMO.

You might get away with it…more likely over the longer term…not.