…Conclusion
We have no doubt that the company is executing very well and that there still is substantial growth ahead of the company. However, growth is decelerating and a path to profitability is quite a bit more murky, and in the meantime the share count is also growing quite a bit.
Taking these realities into consideration, shares appreciating at 10x the level of underlying revenue growth is simply not tenable, especially in the light of the latest acceleration.
FWIW - One of the favorite authors of this board, Bert Hochfeld, sold all of his position in SHOP just recently. Based on valuation of course. Hopes to re-enter on a 20%+ pullback.
SHOP has grown to a 10% position for me. I’m inclined to let it run for a while. Or just buy more if it pulls back.
SHOP has had a parabolic move. I thought of buying some puts but decided this is a long term hold and will use that money to add on significant pullbacks.
"The quarter was strong, the outlook provided by management is eminently beatable and the company is just at the start of its life in terms of disrupting the retail space. I am willing to sacrifice quite a bit to invest in a company with that kind of opportunity.
It was more recent than May 4. Not sure of the exact date.
Was in a portfolio he runs for his paid service.
I won’t be in the habit of reporting what goes on in another paid service, but wanted to share this one with the board as it was so germane.
I’m not an accountant but it seems to me without crunching the numbers this guy might have a strong argument for over-valuation due to management’s improper recording of revenue. Not due to the article but simply the fact that every growth company has to have a pull-back when its market cap grows this fast, I could see using covered calls (considering, in fact) but shorting a rocket? Ouch, talk about reckless, that’s gotta hurt.
I’ve never shorted anything, but I know that they say that you should never short anything based on valuation. You short when the business is collapsing, the CFO is indicted, etc, not because you think the price is too high, especially on a rapidly growing company, with a dedicated founder CEO with a vision. But who knows, maybe he can make a small profit on a fast trade.
Saul
Yesterday In the New Stock Ideas board in the Rule Breakers community, there is an article posted about a private company called Flexe. They bill themselves as the Airbnb of warehousing. They are trying to remove a lot of the challenges to companies trying to lease warehouse space.
Seems to me that this company overtime could have a pretty positive impact on Shopify’s business. The article mentions how company has help mattress company Casper with its warehousing needs. Any company that helps small/ growing internet retailers with this challenge should be good for SHOP.
RaptorD2 gave the link to an article titled “Shortify Shopify - Part 1” The same author has written a follow up article on Seeking Alpha titled “Shortify Shopify - Part 2”. The link is as follows;
The most interesting part of this article is a comment provided by daoist123. It can be found near the end of the comments section. He gives a very interesting prospective on the financial outlook of this company and what the share price may be going forward. I have taken the liberty of copying and pasting some of his comments here. Hopefully I am not violating any code of conduct either written or otherwise by doing so.
“Ok, why don’t we settle this debate using some real numbers?
US retail is about 5 trillion as of 2016. This excludes food, but may include autos (SHOP customers can be food sellers and even auto companies, who knows in the future).
If you really believe in the SHOP model and that it is the next “platform” for helping SMBs and larger customers (SHOP plus, etc…) sell online or even mobile (the “m-commerce” wave is growing at 40% per year v. 20% e-com. v 5% retail), assume SHOP at some point could possibly be behind 30% of all US retail.
I assume total retail grows by 3% annually to 2025. That makes it $6.5T. 30% of that is about 2T GMV that can possibly go through SHOP. Assume SHOP takes a 2.5% cut of that (assuming no increase in take rate). That gives SHOP 49B USD of Merchant Revenue (not even including MRR revenue). I’ll assume, unrealistically, zero MRR revenue for simplicity.
Take 50% haircut on this reported merchant revenue, assuming the interchange cost deduction. That means $24.4B in “net merchant revenue”. Assume this business earns a 10% net income margin (steady state, actual margin could be higher). That’s $2.4B of net income at “steady state” 10 years from now, at scale. Current market cap is about 3.2x of this 10 year net income.
Slapping a 20x multiple on $2.4B of net income gets you $48B of market cap by 2025. Current TSO is about 89M but assume 100M by then for new stock issuances. 48B of market cap / 100M shares = $488/share by 2025 (8 years from now). Since the market is forward looking it will realize this valuation in 2024, 7 years from now. Versus $90/share right now, that’s a 27% annualized CAGR from 2017, not bad even at current levels.”
I did sell covered calls on part of holdings SHOP for trigger at $100 expiring in Sept when it was trading at ~$75 just a few weeks back.
I was surprised to see I could get $3 (almost 4%) for >33% higher price within less than 6 months. As SHOP crossed $90, I realized i didn’t really make a good deal. Seems like a great move today… oh well, we will see.
I am happy to hold all of it for a long time or let part of it go away $100 by Spet.