SHOP - Investment Thesis Part 2

As some of you know, a few of us exited SHOP a while back based on 3 issues:

  1. Valuation concerns - I have presented data here before how sustained high P/S stocks are rare.
  2. Lack of transparency with merchant class - the latter two merchant types being most valuable.
  3. Concern about merchant attrition/churn and quality/duplication of those businesses.

The stock has largely moved sideways over this time but over the past many years, I have found it very profitable to revisit previous companies and reinvest when dust settles and circumstances have more clarity. Often in these select stocks, the original thesis of moat, sustainable advantage, etc. were mostly correct but operational mistakes, macroeconomic circumstances, etc. may derail medium term growth…and yet growth returns. Some examples of these stocks have been AKAM, AAPL, CREE, IPGP, BIDU, ARMH, etc…they were incredible investments repeatedly at various points in time.

But, there are also stocks that never returned to their prior glory.

So that leads me to SHOP…which is it???..the former or the latter? Is it a TSLA type cult classic or a real sustainably growing business.

IMO, concern #1 remains intact…this is a very richly valued stock and requires some major assumptions in growth expectations to justify its market cap…any little hiccup on any quarter and we should expect major price swings. The same threat could be said (and recently experienced) for a short attack…the high P/S (no earnings) stocks are a favorite to attack by shorts whether Citron or other.
Riding stocks with such high P/S requires a strong stomach and longerterm horizon…the 4 multiple I and many others here already locked in, will be hard pressed to achieve again in the next few years IMO…possible, just not as easy as the first go round.

So what about issue #2 and #3 above, “lack of transparency and concern about merchant attrition and quality”.

The lack of transparency on merchant classes has been an irritant IMO with the last breakdown being about a year ago as I recall. Why is this so important? Several months ago, I posted this on the SHOP Investment Thesis:…

IMO, the transparency of the breakdown in customer base is crucial. We need to know what the actual breakdown is:

1) Shopify Lite - perhaps less relevant to the bottom line but the initial target market
2) Basic Shopify - same as above
3) Shopify - at only $948 annual subscriptions, still low interest
4) Advanced Shopify - at $3588 annual subscription, these businesses are likely more serious and capitalized
5) Shopify Plus - at $24,000 these are the best capitalized and likely most serious businesses.

Recall that the growth in Shopify Plus customers was 126-150% YoY to around 2500…that then yields $60 million in annual revenue. Same calculation for the Advanced customers estimated at 20,000 customers yields $72 million.

So together, these latter two customers generate $132 million in subscription revenue annually vs what at year end is estimated to be around $300 million in subscription revenue…hence these two account for 44% of subscription revenue but represent only 4.5% of customers!!

Now obviously, if the latter 2 merchant types which represented only 4.5% of all merchants were generating nearly half the revenue of the company…I would REALLY want to know what is happening with those latter 2 merchant categories particularly in terms of growth rates!

When they last gave us numbers, the Shopify Plus was growing 126-150% YoY…if that were to continue, it would be a massive ramp in revenue based on the contribution % to total subscriptions.

For example, if Shopify Plus grew from 2500 to 5000, that would yield $60 million in additional revenue on subscription alone for a MRR of approx $10 million. If they doubled the next year, that would yield additional $120 million for a MRR of $20 million and again the next year and additional $240 million for a MRR of $40 million…all based on this latter merchant class.

Same issue for the Advanced Shopify merchant class…20,000 growth yields additional $72 million, if then doubled again would yield additional $144 million and so on with the respective increases in MRR similar to the above paragraph for Shopify Plus.

All total between these two classes, we would be seeing MRR increase estimates of $20 million this year, then $40 million next year, then $80 million the next and so on…or until growth in these latter two classes slows. For simplicity, I am ignoring the other revenue types and just concentrating on the subscription revenue as a clue to the health of the SHOP business and whether the revenue growth is sustainable or at risk.

But suffice to say that the later two categories, if growing, should produce subscription revenue on a MRR bases that dwarfs the other merchant categories…in Q3 2017, it was 20% of total vs 18% in Q2:…

Example calculation with 3Q17 Acceleration of Growth:

3Q17: $26.8 million MRR x 12 = $322 million (annualized MRR)

3Q16: $16.3 million MRR x 12 = $195 million

3Q15: $9.8 million MRR x 12 = $118 million

Since SHOP has decided not to be transparent on merchant class breakout, perhaps we can indirectly assess the growth of that class from my above estimate of MRR based on last reported numbers and expectation of growth in those classes.

To extend from the above Q3 numbers, using the growth assumptions as I estimated above AND assuming the concerns about lower class merchant churn/attrition is correct (that these lower class numbers may not be durable), we should expect:

2017 MRR = $27 million or annualized $322 million (of which 56% was lower class revenue or $180 million)
2018 MRR = $35 million or annualized $414 million (of which $180 million is lower class)
2019 MRR = $59 million or annualized $708 million (of which $180 million in lower class)
2020 MRR = $103 million or annualized $1,236 million (of which $180 million is lower class)

Essentially, this “model” assumes churn of lower quality merchants (hence no growth in revenue projections) but growth of latter 2.

So these are the numbers we should be looking for as a vector into the health of the SHOP merchant class since they are no longer transparent with us on the numbers…it is a rough approximation obviously but if one sees the MRR growth rates slower than the above, that would seem to imply they are not converting lower merchant classes to higher quality higher revenue upper classes (Shopify Plus and Advanced Shopify).

I also get that they need to expand the lower classes because from those classes will the cream rise to transition the successful merchants to better paying upper classes…but I am more referring to the expressed concerns about issues #2 and #3 above…the quality, attrition and churn of the lower merchants classes that make up 94% of the merchant class pool.

I also appreciate that SHOP must recognize that these latter two merchant types are their future because they have recently heavily invested in the development of these classes through sales,etc.

Now there may be reason to believe that they are pulling off the Shopify Plus growth…from their most recent earnings call in Oct:

Moving on to Shopify Plus. Shopify Plus did a record number of launches in Q3. ZThis included brands like Phoenix Suns, RBS, Josie Maran Cosmetic Line and earlier this month fashion powerhouse Rebecca Minkoff. A number of branded consumer package goods also launched including the Gurmay, an iconic muster brand Mai, Blue Diamond Growers and Beer Nuts.

“Record number” may not be a doubling but was certainly better than other word choices.

Subscription solutions revenue grew 65% to $82.4 million; the underlying monthly recurring revenue also grew 65% and ended the quarter at $26.8 million. The slight acceleration over last quarter is due primarily to another record number of merchants paying to run their business on the Shopify platform. Within this subscription revenue from Shopify Plus continue to expand. 20% of overall MRR came from Shopify Plus in the third quarter or $5.3 million compared with 18% of MRR for Q2 of 2017. Merchant solutions revenue grew 79% to $89 million

So to make a long story short, for those concerned about issues #2 and #3 above, I think we have an indirect vector to track…the MRR! Tracking this number closely may allay one’s concern about the floor falling out from underneath SHOP’s lion’s share (94%) of weak hand merchants.

If the latter two categories are growing as we would expect for a high P/S stock, we had better see these numbers approximating the following (keeping in mind that since additions occur daily, the numbers below will lag behind somewhat…we should be looking for a blend of 2018 early but closer to 2019 toward the latter quarters of this year):

2017 MRR = $27 million
2018 MRR = $35 million
2019 MRR = $59 million
2020 MRR = $103 million

Feel free to shoot holes in this analysis particularly from the bears who may be more distrustful of the company in light of its valuation and the Citron report.



Hi Duma,

Nice work on this. Yes, I think we can track MRR, but we can also track GMV as the total amount of business moving through SHOP is a good indicator.

I don’t care one bit what is the percentage of merchants using the premium subscriptions. Don’t care if it’s 4%, 40%, or 0.04%. I care about the absolute numbers. 2500 Shopify Plus and 22,500 Advanced Shopify merchants might be the current number. I care about the rate of change of these classes as they are generating the most revenue. But since they don’t report the numbers we can use MRR, GMV, recurring revenue, recurring revenue growth, margins, etc. to determine the health of the business and whether the growth is continuing at a blistering pace.

I also care about the overall rate of revenue growth and the rate or recurring revenue growth. So far these rates are not slowing and as long as they are not, I’m VERY happy.

So how does SHOP get new Shopify Plus and Advanced Shopify merchants? Do they graduate from the lower tiers or do they onboard directly to the high tiers? If they are graduating primarily then I like to see a lot of lower tier merchants to give SHOP more chances to have more graduating merchants. This is sort of like WIX having 100M free accounts and only a few million paying accounts.

The stock has moved sideways for about 6 months so it’s actually gotten cheaper because SHOP is growing the business rapidly. I’m expecting a great Q4 result and have positioned myself for the upside when they report the results in a few weeks. Here’s what I wrote about 2 months ago:…

As for a short attack, that’s already happened. It it happens again it will likely be less effective but I don’t mind to have another opportunity to make some more money if someone wants to drive the stock price down again.



So how does SHOP get new Shopify Plus and Advanced Shopify merchants? Do they graduate from the lower tiers or do they onboard directly to the high tiers? If they are graduating primarily then I like to see a lot of lower tier merchants to give SHOP more chances to have more graduating merchants.

Hey Chris!

In one of the earnings calls, Tobi said that 50% of the higher merchant classes came from the lower classes…so clearly these lower classes can help grow the more profitable 2 classes…but not exclusively. Think about this for a moment…I have 500,000 total merchants but only 1250 made it to a Shopify Plus merchant classification!

The other half came from outside which likely explains their big increase in staff targeting acquisition of Shopify Plus merchant types.

I seem to recall that the lower class’s carrying/acquisition costs were pretty nominal so if they latch on for the ride, maybe not much of a drag even though they may not be material to SHOP’s success (the theory goes) unless they move upstream to the latter two merchant classes…a very small % of total merchants.

Seems to me that early on the stock market got so enamored by total merchant growth that they also became worried about their lesser quality/churn later…understandably so when 94% of SHOP’s merchants may be weakly capitalized mom and pop resellers, etc. But it also seems to me the latter two merchants are what gets SHOP the next 4 multiple.

Thanks again Chris and really enjoy reading your posts!


Is it a TSLA type cult classic or a real sustainably growing business.

Thanks for throwing in that utterly irrelevant dig before I dove into your detailed analysis. People who think Tesla is a “cult classic” as opposed to a hugely undervalued business opportunity are not capable of telling fact from fiction. “Analysis” based on false premises is best ignored.

(long SHOP, AAPL, and way way long TSLA)


I don’t find GMV to be as valuable as you do Chris. The reason for this is because anyone can sell an awful lot of product for little or no profit. Thus increasing GMV numbers, but that does not make it sustainable

SHOP grows it’s merchant numbers because merchants make profit, not because merchants have gross sales.

Same thing happened at EBay and the merchant growth ended. Only so many merchants could make profit as it all got sucked out w the increasing competitiveness of selling on EBay.

Thus, I do not appreciate GMV as a harbinger if long term value.

There are only so many small undifferentiated merchants that can enter the market and make a profit and thus become sustainable. Thus SHOP will have to focus on quality more than quantity at some point.

Duma is therefore in the correct track I think from a longer term perspective.

We have no numbers but I think it not likely that a large percentage of the ranks of more premium merchants come from the vast quantities of undifferentiated lower level merchants. The key is undifferentiated.

But for further review. The future of SHOP is Shopify Plus and other premium services. Then again I’m not Toby, just me. Toby I am sure already knows the answer but is not telling us. His actions will tell us over time.



the pros and cons of DHOP are both phrased so well in some of these posts it is hard for me to find a lot of major flaws with either opinion. In fact in addition to lacking the ability to see into a murky future it seems we lack some of e tools to see what is actually going on with Shopify today.

Clearly there must be some upper limit to small customers, but has that limit been reached? For every merchant that fails another will arise. We just lack the data to know about bigger customers. Is that because Shopify does not want stockholders to know, or because they don’t want competitors to know?? Answer that and you may know whether to buy SHOP or not.

Having limited time and energy I don’t concentrate on SHOP. Don’t own any now. But I am tempted to buy a little before earnings report, e-commerce is coming and SHOP is less expensive than it was than it was.
A great earnings report will wipe out any Citreon hangover.
But in general there are companies I am way more sure of, lots of places to put significant money other than SHOP.

earnings whisper
different sites give expected earnings report date as 2/14 to 2/22