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Will the times of the cab driver giving stock tips return?

Does it matter that cab drivers have been replaced by amateurs like Uber drivers?

As far as millennials fearing the stock market, that has been observed.

In my view, it’s not fear as much as it’s not having money. This article supports that: http://www.cnbc.com/2016/04/01/heres-why-millennials-arent-i… There’s also the rise of 401Ks. I bet some young people don’t think of those as them investing in the stock market.

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<<<Will the times of the cab driver giving stock tips return?>>>

This statement alone provides a clue as there are not many cab drivers left as the new tech boom has created a better way (from the perspective of the consumer and non cab drivers).

Also, Trump elected world goes on and w hope of lower taxes and more business friendly policies (tbd), as well as events, dramatically built up as end of world like BREXIT, having zero effect on economic activity.

Mauser indicated that althiugh we hear about it nightly, that in the scheme of history, that ISIS and North Korea and Iran and small fry in comparison to the threat Nazi Germany and then the Societ Union and worldwide communism posed. Thus it is rational to have less anxiety in regard.

New technology is creating real change and economic efficiency, just as the Internet revolution did,!butnthis time only the Apps that are really big and special are going public. Not every Tom Dick and Harry internet company.

Sonia fundamentally different.

But you know, this bull will end differently than the last, probably for what looks like a stupid reason, and we probably won’t see it coming. Just the way it is.

Tinker

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and the proverbial cab driver was giving out stock tips.

Can you imagine a self-driving Uber giving you stock tips? Like Mr. Spock, no emotions, and lots of artificial intelligence and big data to back the recommendations. Times might be different after all…

The Captain could not resist :wink:

My strategy for the 2001 bust was to hold on. What went wrong was that I had several speculative positions that went bankrupt. I didn’t have a proper exit strategy. This time around I plan to also hold on but now I don’t have speculative positions like I had back then. The big risk is having to sell good stocks at bargain basement prices. If you don’t have to sell and if the positions don’t go bust but rebound, the situation might be stressful but the outcome should be OK. All my high tech positions are in three ETFs that represent some 130 stocks.

Denny Schlesinger

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Millennials Don’t Trust the Stock Market.

Sounds like climbing a wall of worry. The best and safest kind of bull market. But who knows? Not me.
Saul

Younger people might be less inclined to be invested because they have no money (more people going through more schooling, delaying earnings). There’s also a long trend throughout history of cycles being sped up because of increased flows of information and people. Especially in the market with high frequency trading etc. How many crashes has a 30 year old seen in the past 20 years? Compare that to the 20 years before that?

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Millennials Don’t Trust the Stock Market.

Baby boomers shouldn’t trust overly broad blanket statements.

The older I get, and I hope I keep doing so, the more I find statements like this less than helpful. In this case, who are the millennials? What percentage out of what sample size? And are they distrustful of the market or just see better opportunities for for their money at this point in time?

I think, no, correction, I don’t think about it. Not worth my time.

Jeb

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ears,

thank you for the excellent and helpful reply.

best,

rich

bitb

It’s a rotation into high-tech, I don’t know why.

Probably because it was out of favor last year. See YTD IJS vs FDN. One who could pick sector rotation could make a very good living. Individual companies are much easier for me anyway.

AJ

“All my high tech positions are in three ETFs that represent some 130 stocks”

Captain, care to share which ETFs you have chosen?

It’s a rotation into high-tech,
true. And it make those of us who invest in high tech look cleverer than we actually are.

Is a corollary of that that "value"is actually down or are they unrelated? Whatever considering interest rate according to Buffett the general market (SP500?) is not overpriced. But Nasdaq may be.

Rotation into high tech- is it just a fad , every dog has his day thing. Or maybe , just perhaps, we are seeing an acceleration of the post industrial revolution, discoveries made years ago are working their way into the real world. Shaking things up, Schumpeter creative destruction now in high gear. If so those companies benefiting from it are not as overvalued as they seem

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Captain, care to share which ETFs you have chosen?

FDN - Internet
PSCT - Small CAP IT
XSD - Semiconductors

Denny Schlesinger

noteable is that the “greed index” was in fear zone only a month ago. As you point out it’s volatile.When many of us were doing a lot of buying. As you point out it’s volatile

Actually Greed or better yet Hope is the dominant emotion in most humans. Fear becomes dominant only occasionally. Since unlike the other two it is accompanied by body chemistry changes it is more powerful. Thus Bears are steep quick and nasty.

I do have a VIX market buy signal. Unfortunately it has been activated only once since the VIX became public

There’s also the rise of 401Ks. I bet some young people don’t think of those as them investing in the stock market.

I recently read that the military is shifting it’s retirement plan, in part, to TSP which is the government’s version of a 401k. The government would match up to 5% in exchange for reducing your retirement pension from 50 to 40% of your income for 20 years of service. Previously, military personnel had no way of contributing to their own retirement other than IRA’s. I wonder if this will impact the market as well. Military personnel make up less than 1% of the workforce and many may not take this option but it could still be significant.
Fred

Some might think that the people can be leveraged mightily in a subscription model.

Hi Mike,

Appreciate your comments. Just so I understand your viewpoint…

By definition, variable costs are costs that change in direct proportion to the volume of activity.
For Shopify, that proportion has been about $1.10 in cost to each $1.00 of revenue. That’s stayed
fairly constant for the last five years. So far we haven’t seen any evidence of what’s called
“operating leverage”, other than the leverage provided by giving out increasing amounts of stock
each year.

So are you saying that at some point in the future that proportion will change? If so, roughly
when do you see that happening, how much of a change, and how did you arrive at the number? Or
is it more a gut feel on your part that something good is bound to happen but you can’t quantify
it?

Thanks,
Ears

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Hi Ears - fascinating debate…

My understanding is that revenues and costs were linked in that 1:1.10 ratio deliberately in order to avoid making profits too early. I believe Shopify does have operating leverage. The cost of goods have stayed a similar proportion of revenues and that might be expected - the leverage should come from the SG&A and R&D spend increasing but at a lower rate than revenues - now they have also gone up by the same rate but who’s to say that the SG&A and R&D spend increases are not just tied to the incremental business revenue and operations increases but actually spending levels that are being spent in advance to build a platform to support 10x the size of today’s business operations e.g. Building an HQ etc.

That is what Bezos has said he is doing and it is also what Tobi Lukes has been stating he is doing. Of course it could be BS but I believe they have it figured.

Ant

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Gross Profit


2015	22	25.4	29.4	36.5
2016	40.1	47.5	53.8	68.1

Cost of subscription solutions 10.1%
Cost of merchant solutions 36.1%

Cost of revenue: 46.2%

Shopify had a faster growth in merchant solutions vs subscription solutions last year, hence gross profit being slightly lower % of total revenue (55% vs 53%).

So why are they losing money? Operating expenses keep rising.
Sales and marketing was a whooping 129 mil in 2016.

Quote from their annual report:

Sales and marketing expenses increased $58.8 million , or 83.6% , for the year ended December 31, 2016 compared to the same period in 2015 , primarily due to
an increase of $29.4 million in marketing programs, such as advertisements on search engines and social media, to support the growth of our business. We believe
the strong investment we are making in external marketing programs and internal ones, such as Shopify Unite, the Company’s annual Partner and Developer
conference, our Build a Business competition, our retail tours, and the Shopify Blog, continue to be effective in growing the number of merchants using our
platform. During the year ended December 31, 2016 the total number of merchants increased 62.5% to more than 377,500 . In addition to external marketing
spending, employee-related costs, including facilities expense, increased by $26.0 million in the year ended December 31, 2016 , primarily resulting from total
sales and marketing headcount growth of 91%…

Sales and marketing expenses as a percentage of revenue have decreased year
over year as revenue from merchant solutions generally requires significantly less marketing expense than Shopify’s core subscription business.

R&D increased 34 mil and General Admin increased 22mil, primarily due to employment costs.
Let’s assume G&A will continue to increase at the same rate as revenue increases, and keep R&D at 20% of revenue (although this is coming down). It is a tech company after-all, so to maintain its advantage and to continue growth it needs to invest in R&D.

So a large amount of leverage could come from Sales and Marketing. At a cost of 129 million in 2016, if we removed it completely we’d have got a net profit of 95million in 2016.
That gives us a nice P/E of almost 100 :slight_smile:

% cost of revenue
Solutions    46.2%
S&M          33.2
R&D          19.1
G&A          11.1
Total        109.6%

TL:DR What Ant said.
None of this is looking at SBC. We’re all putting our hands together and praying that Tobi can increase revenue massively and start leveraging and creating value. In the meantime we hope SBC isn’t destroying long-term value for us.

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If you have to hope and pray you are not investing.

Denny Schlesinger

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Ant & Billy:

One thing we haven’t mentioned yet is raising prices. Somewhere in one of the conference calls
I saw something about a selective price raise…I’ll have to go back and see if I can find it.
Anyway, they are giving the service away right now, but the advantage to that is in building
market share and discouraging competitors – as soon as they start getting a significant return
on investment and prove it’s a successful business model, they’ll attract competitors like flies
to honey. Assuming they can gain some scale before then, then pricing is one answer to the
operating leverage problem.

Billy, I liked your thought process…up to the part about hoping and praying. In the euphoria
surrounding Shopify I’ve seen very few serious attempts at charting the path to profitability.
You look to be headed down that path.

Thanks,
Ears

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Hello Ears,

I agree with Ant’s response. SHOP has planned to spend (for the time being) its cash flow to support the construction of a dominant position as an ecommerce platform. Since stock-based compensation is a non-cash expense, it is supportive of this plan. The SBC is more necessary as the platform is being constructed and less so as it is market-dominant. It is also discretionary and can be reduced when appropriate.

Certainly, I don’t have a crystal ball that can tell when and how much op ex will be reduced. To the extent that personnel additions today are accelerating the dominance of the platform, they can certainly be reduced as a percentage of cost when dominance is secured. IMO, it is a mistake to look at the results of the past 5 years and extrapolate that historical cost configuration into perpetuity. The stickiness of the subscription base that is being acquired with today’s costs would not go away entirely if the sales and marketing staff were eliminated. On the merchant solution side of the business, inflation alone will grow revenues faster than costs.

Management has skin in the game and thus far has made good decisions. Investors have to decide their level of trust that management will reduce costs when appropriate and thus make real profits. At some point the mere growth in revenues will no longer support stock price increases. By then profits must be growing substantially or most of us will no longer be shareholders.

Best regards,

Mike

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Hello Ears,

One thing we haven’t mentioned yet is raising prices. Somewhere in one of the conference calls
I saw something about a selective price raise.

They introduced new pricing on Shopify Plus which raised the minimum monthly amount and capped the maximum charge. It will take some time to model the impact of an ever-changing mode of operation.

Shopify Plus is demonstrating that the enhanced features of the platform are attracting larger and larger merchants. While this is very positive for current revenue growth and will expand margins, it is yet unclear just how sticky these larger merchants will be. I fear that many are testing the efficacy of ecommerce and may decide to develop their own platform if successful. I am sure that the cap in the pricing scheme recognizes that possibility and the hesitance to have any one customer grow to such a size that the loss would be devastating such as TWLO’s loss of some of UBER’s business.

Best regards,

Mike

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Thanks Ears,

I enjoy your contrarian posts on this board. It helps keep euphoria in check and makes us really think about these investments.

My hope and pray comment was tongue in cheek. However, you are correct, a solid attempt at charting the path to profitability is needed, but any such attempt is still speculation. I’ll try having a go tomorrow with two attempts. One sprinkled with rainbows and unicorns, and the other bound in hellfire and sinking into the depths or Mordor.

I’m also having a look at Talend. Again ignoring SBC, revenue is costing them 120%.

Cost of revenue + Operating expenses as % of revenue


2015     110.48%  123.89%  120.50%  132.38%
2016     124.78%  131.60%  124.07%  120.33%
2017     121.28%			

Looking purely at that table, there’s not really any sign of the company edging to profitability.
I know a large part of the thesis is in the subscriptions, recurring revenue. I need to get my head around how this works out. End of this last quarter they had 81 million as deferred revenue liability.

Story of the company is:
room for massive growth
creating a market
little/zero direct competition
decent leadership

In both these companies, the thesis boils down to this. Throw the house at aggressively conquering and growing the market. Profits don’t matter. Plow back everything into this strategy. When we’ve conquered the market, dial back on marketing expenses. Profit.
The strategy relies on still being and remaining the dominant solution when spending dials back.

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