Shop and Square: What did I do?

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What I did:

Since this was a pretty major change, I thought I’d let you know.

I was pretty appalled by Shopify’s slowdown. I agree with Ethan’s summary that they are no longer a SaaS company, but more of a large conglomerate which is just slowing down.

Here’s what revenue growth percent looked like for the last six quarters:


**2017:   75   75   72   71** 
**2018:   68   62**

Note the sudden huge drop from 75% growth to 62% growth. And the large sequential drop also. In a quarter when the overall economy was booming. Makes no sense. Along with almost doubling their GAAP loss, and making all of 2 cents adjusted, up from a loss of 1 cent. Whoopee!

If you are going to be a slower growing, non-SaaS company you need to make more than 2 cents to maintain a stock price of $150. My opinion, anyway.

Compare to Square’s results

Here’s what revenue growth percent looked like for the last six quarters:


**2017:   39   41   45   47**
**2018:   51   60**

Note that their growth is accelerating each quarter while Shopify’s is decelerating each quarter. Note the huge acceleration this quarter from 41% growth to 60% growth.

And here’s what subscription and service revenue growth percent (the high margin stuff) looked like for the last six quarters:


**2017:  104  97   86   98** 
**2018:   98 131**

That 131% growth is not a misprint. That’s what they were up.

Combine that with this:

The rapidly growing part of Shopify is the low margin part (as I understand it), the Merchant Solutions part.

The rapidly growing part of Square is the high margin part (as I understand it), the Subscription and Services part.

The rapidly growing part of Shopify also decelerated sequentially from 102% growth to 90% growth.

The rapidly growing part of Square also accelerated sequentially from 98% growth to 131% growth.

So we have one company with falling growth and falling overall margins. We have another company with accelerating growth and rising margins. They are crossing over each other at 60% growth rate. Everything about Shopify says still flying but coming in for a landing. A sports car instead of a jet plane. Everything about Square says taking off. One plane coming in for a landing, the other taking off. Again, I don’t have to understand the technology. The numbers speak for themselves.

What did I do? I sold about three-quarters of my Shopify and added a lot of Square, but also nibbled on Mongo, New Relic, Twilio, Zscaler, etc. I was able to buy Square in the pre-market at about $65.20, and then later added some more at about $70.30.

Hope this helps

Saul

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I had actually considered doing something very similar after noting yesterday just how impressive Square’s results were and having noted the slowdown of Shopify’s revenue growth.

The fact that I did nothing with either Shopify or Square almost makes me feel like I missed an outstanding pricing opportunity with Square being down in the pre-market earlier and right after the open.

Rather than see it as a missed opportunity (other than the missed not-to-be-named intraday opportunity from a certain type of financial contract :slight_smile: NOTE: only good fun intended with this parenthetical…even though my SQ Aug 3 $68 c FOMO is strong at the moment), however, I will remind myself that I have never at any point trimmed my Square position of shares but I have trimmed Shopify in the past. Thus, my SQ position was already larger than Shopify, and that disparity will likely continue to grow.

I have already previously patted myself on the back (on Twitter if not elsewhere) for only having 1 of the 4 “War on Cash Basket” stocks that Jason Moser has mentioned on many Motley Fool podcast episodes due to the fact that I had the far and away best performer of the 4 in Square (Mastercard, Visa, and Paypal being the others). Another name for that basket could almost be the “Matt Cochrane Ticker Guide Basket”.

-volfan84
Long SQ and very, very, very impressed with what Jack Dorsey has accomplished in the past few years leading both Twitter and Square at the same time…which reminds me, might be time to add some Twitter

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Saul,

I’ve been lurking and learning on this board since virtually its inception. I rarely post because I don’t feel I have much value to add. I want you to know how much I appreciate your willingness to share and educate. You are amazingly steady and true.

I decided it was time to post a thank you because today, for one of the first times, I analyzed the numbers and peripheral information and reacted in virtually the same way you did - BEFORE I knew what you did.

May seem trivial to some, but to me, it is evidence that I’ve learned and evolved.

Thank you for teaching this man to fish!

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Saul, I hope you don’t mind if I ask how you persuaded yourself to sell three quarters of one of your high conviction stocks at a loss of perhaps more than 15% without waiting at least for a few days for the share price to recover?

I would like to learn the thinking process behind such a decision as I have been hesitating to sell my large holding of Shop and hoping the price will recover if I wait for a few weeks.

Thanks for all your helpful posts.

Regards.
alpha

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Saul would say that you’re price anchoring. If you don’t believe in a stock, get rid of it and invest money in one that you have great conviction in. Waiting for a stock to recover might mean losing more money, and missing out on an opportunity.

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Saul, I hope you don’t mind if I ask how you persuaded yourself to sell three quarters of one of your high conviction stocks at a loss of perhaps more than 15% without waiting at least for a few days for the share price to recover?

Hi alphab,

Well, first of all, since I had started buying it at $27 two years ago, my problem wasn’t a loss, but a gain, which thankfully was mostly longterm.

Second, I was dealing with it at the price it was today, not worrying about it having been at $173 a week ago. That was irrelevant. I don’t know when, or even if, it will be anywhere near $173 again, and I didn’t want the opportunity cost of sitting on it. The Square that I bought in the premarket is up 11.2% from that purchase, right now this minute as I write.

As far as waiting for a few days, all the stocks were down because of the selloff the last few days, and I could get a nice bounce from any one of them. A lot of my stocks are up 4% to 5% now today.

There’s a term for what you are doing. It’s called price-anchoring. The stock doesn’t know or care what you paid for it. You have to think, “Where is the best place for my money right now?” not “I hope it will come back to where I bought it so I don’t have to take a loss.” A loss on a stock is irrelevant, it’s what your entire portfolio does that counts.

I hope that helps,

Sual

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Saul would say that you’re price anchoring. If you don’t believe in a stock, get rid of it and invest money in one that you have great conviction in. Waiting for a stock to recover might mean losing more money, and missing out on an opportunity.

Hi HiTechGuy, if I had known you had already answered the question so well, I would have saved myself a lot of effort. Thanks,
Saul

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Thanks for your response.

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I took this opportunity to donate SHOP shares. I didn’t want to deal with cap gains, and the Sch A tax deduction is attractive.

Just a thought for those who procrastinate until year end to donate to their favorite charitable orgs.

🆁🅶🅱

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Thanks for the post Saul. I did something similar when I posted my concerns the other day after the SHOP ER. Even though I transposed a “3" and a “0" inadvertently slowing SHOP’s growth more than reality, I still drew the same conclusion after Bear’s correction. I know you aren’t much of a valuation guy but I felt that the P/S the market is willing to pay may continue to contract given the growth slowdown and the stock price would become relatively stagnant until growth accelerates or at least stabilizes (and it could if/when they go more international). As far as SHOP margins go, I think they improve after the next quarter given what mgmt said during the call as costs incurred from moving to the cloud would be mostly complete. However, that wasn’t enough to keep me from selling about 40% of my shares. Rather fortuitously I had sold some in the 170’s a few weeks ago to buy more TWLO.

I also bought most of the same with SQ (AH yesterday), MDB (pre market today) and TWLO (earlier in the week) being the beneficiaries of the new cash. Anyway, good to know I’m thinking more like you :slight_smile:

MC

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As far as SHOP margins go, I think they improve after the next quarter given what mgmt said during the call as costs incurred from moving to the cloud would be mostly complete

That refers to the expenses of moving over to the cloud and accelerated depreciation from their own storage that they are closing down. I was thinking more of the increasing percentage every quarter coming from merchant solutions instead of high-margin subscription solutions.

Saul

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That refers to the expenses of moving over to the cloud and accelerated depreciation from their own storage that they are closing down. I was thinking more of the increasing percentage every quarter coming from merchant solutions instead of high-margin subscription solutions.

Beginning next year, it will also be a result of a change in the Merchant pricing. This is from the call:

We feel at this point now, that for all new merchants that are coming on, and obviously merchants that are expiring on their contracts, that are renewing their contracts, that the cap is just no longer necessary. And so in many ways, the removal of the cap is more forward-looking and future-looking in terms of if we have a merchant that comes on now, that is going to sell a lot of products and increase a lot of GMV we want to make sure we share in that upside. And this removal of the cap is exactly that for us as well. So I wouldn’t say that the removal of the cap has been a massive driver for us to date, but it really does future prove our pricing model for Shopify Plus to ensure that we consistently share in the upside going forward.

Also, this is another answer from the same question in the call:

Well, most of the merchants are on a contract, so when the contract expires they’ll be renewed on the new pricing model.

Basically, larger customers on Shopify Plus sell more stuff and their price caps will expire, meaning more money for Shopify, all else equal, with no additional effort. Let’s see if it has an impact on customer growth.

DJ

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There’s a couple of things that I thing we are getting not entirely accurate on here with SQ vs SHOP.

First I like both companies and I think both will have great growth for many years to come and I picked up more shares of SQ at market open because I liked what I saw in the report. SHOP and SQ are two of the most important companies in commerce for the next ten years.

On the 131% growth number.

We saw strong momentum in subscription and services adjusted revenue growth, which accelerated to 131% year-over-year, driven primarily by Instant Deposit, Caviar, Cash Card and Square Capital and also included the impact of the acquisitions of Zesty and Weebly.

This was not a 131% jump in “subscription” revenue. We have no way of knowing how much of that is in fact our coveted MRR because it is also “services” revenue. Instant deposit, Cash Card, and Square Capital (3 of the biggest drivers of the 131%) are not subscriptions. These services are per transaction type fees just as Shopify’s services are. Caviar and the acquisitions of Zesty and Weebly are primarily subscription models but there is also a deal of services involved with those as well. And since this 131% number includes two separate business acquisitions for the first time, we know this super high number WILL NOT be sustained after the effect plays out. We simply do not know what the growth rates of those individual segments are.

Essentially SHOP and SQ have a kind of parallel business where they do a lot of the same stuff with SHOP’s core being eCommerce and SQ’s being point of sale. SHOP’s land is an eCommerce web hosting platform (subscription) and their expand is merchant solutions(Payment transactions, shipping, ads, mobile, Capital) With the exception of a few things like PoS station sales, the entirety of what Shopify does is Software as a Service(SAAS). I don’t get this idea that they are moving away from that, everything is software and everything is billed as a service. Some of services are higher margin (shipping and Capital) and some are lower (payments processing). Square’s land is Payment Processing and their expand is a suite of the aforementioned subscriptions and services.

On (Gross) margins

Payment transactions produces a lower margin than the other subscriptions and services for both companies. About mid 30’s gross margin again for both. The difference is the overwhelming majority of Squares revenue is payment processing (the Square reader dude) while Shopify’s payment processing is a much smaller portion (but growing)of the overall business.

Square produces gross margins in the 36-38% range and from the call their long term goal is 35-40% with a possibility of achieving 50% someday. Meanwhile Shopify produces high 56-58% margins with some contracting for another quarter or two as they transfer to the cloud and build out infrastructure to support higher quality Plus customers.

SHOP’s gross margins will probably never be much less than 55% while Square’s will probably never be much more than 40%.

Both of these customers offer platforms to help businesses succeed in selling stuff, so to me one of the most important metrics for how well the company and their customers are doing committing commerce is Gross Merchandise Volume on the respective platform. For both companies to grow they must have more product transacting on their platforms. This represents new sales from new customers and increased sales from existing customers.

GMV growth for SHOP came in at 56% and Gross Payment Volume for Square was up 30%. Both companies results were the lowest numbers for growth in this metric since going public.

I agree that SQ had a great quarter and their business is expanding in welcomes ways. It is a great reason to buy more shares and be excited for the future. If that is the case, one should be about equally excited about investing in Shopify. These are two companies that should have high >40% revenue growth for many years to come. Which one is better? I don’t think there is an answer to that, but they are both great and they are both important.

Darth

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What did I do? I sold about three-quarters of my Shopify and added a lot of Square, but also nibbled on Mongo, New Relic, Twilio, Zscaler, etc. I was able to buy Square in the pre-market at about $65.20, and then later added some more at about $70.30.

Seeing the recent share price moves for both SHOP and SQ, I have to revisit this thread and applaud the moves made by Saul (as well as others), which were quite deft. Saul’s August summary this weekend is going to seem almost cartoonish. The SQ purchase at about $65.20 is up about 30%…and that is simply shares (no leverage from options or anything). The Mongo nibbling is certainly up a good bit too, from probably $55-ish to $72-ish, also about a 30% gain (within the same month).

It seems that the market has now mostly caught up to the thinking that this board had as far back as August 2nd.

-volfan84
LOOOONG SQ; only LOONG SHOP…with SHOP in my penalty box (which BOFI was jettisoned from to no longer being in my portfolio earlier today)

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I would love to revive this thread once again as to the divergence in share prices of Shopify vs square.
Both great businesses
Do you think the Great increase in Shopify shares vs Square is justified at this point ?