Shop q2 2018 review

Business Highlights

- multi-location, which enables merchants to track and update inventory across multiple locations
-fraud protect for Shopify payments, which helps merchants sell with greater confidence; and the introduction of the tap and chip reader to transform in-store shopping experiences.
-buy-one-get-one capabilities and quantity discounts.
-Ping, our mobile app that consolidates merchants’ business conversations with staff, customers, and even their AI employee that are known as Kit. Through Ping, merchants can now run their store and handle their marketing conversationally.”
-dynamic checkout, which enables shoppers to quickly check out directly on a product page using their preferred payment method. This feature is expected to increase conversions by further reducing friction to complete a sale.

My comments: these will drive merchant solutions, not subscription revenue.

Shopify Plus- lots of new adds
Shopify plus fee cap is being removed for renewals and new contracts (more money to shopify)
shopify Flow,- automation for Shopify Plus.
Connectors for Shopify Flow, expands these automation benefits to apps and services, allowing merchants to simplify workflows across the tools that they use every day.
multi-currency feature later this year for Plus merchants, which will allow them to sell in multiple currencies and settle in their local currency.

My comments: I like the push toward larger clients and making plus more useful for larger clients.

-Continued push into physical retail,

Total revenue - 245 Million, up 61.5% yoy, compared to 68%, 71%, 72% for the preceding quarters 4 quarters
Merchant Solutions -134.2 million, up 68%, 75, 74, 79
Subscription Revenue - 110.7 up 55%. Compared to 61, 66, 66
MMR 35.3 up 48%, 57, 61, 64
GMV of 9.6 billion, up 56%, 66, 65, 69

Q3 increased from 245 to 253-257 million
Year increased from 1.01 to 1.015 to 1.025

Margins and expenses:
I lost all my margin data. Cost of revenue increased, margins for the most part were down. More on this below. If someone else has the energy to post that info I would be grateful. I’ve hit a wall.
More below

No real new information here, still about 1.6 billion in cash
Filed a 5 billion shelf registration. More info below.

Misc from CC:
Question : “with the move to cloud over, can you just give us a sense on the cadence for gross margins for the rest of the year? “

Yes, sure, let’s start with the second quarter performance. As we had indicated on the last call, it would be impacted by the migration to the cloud, which it was. We have subsequently completed migration of our customers over to the cloud, which was a huge milestone and we now in the third quarter expect to just be finalizing elimination of duplicative costs and accelerated depreciation on our servers as we decommission. So we expect to be largely completed in the third quarter. Subscription margins will be impacted again in the third quarter, we expect comparable subscription margins to the second quarter. But as we exit the third quarter and enter the fourth quarter with all of that behind us, we expect a sequential increase in subscription margin.

Payments are low margin business
Shipping and Capital are high margin
Payments are growing quickly due to shopify plus
over merchant solutions margins should increase slightly in 2018 over 2018

An important comment on the shelf registration. I’m going to paste in its entirety since I think this is very important.
Yes, I’d like to just add a couple of comments while we’re on that topic, just to be clear in addition to my script. In Canada, shelf registration statements expire after two years, and our current shelf was due to expire in early September. We renewed at this point in time a little earlier than the expiration because we wanted to have the opportunity to discuss it directly on this earnings call. I want to emphasize, we have no intention of an immediate offering. Unlike the U.S., where there’s no fixed dollar amount required for a shelf, under Canadian law we must enter a dollar amount. So, it makes sense for us to maintain flexibility. The amount is commensurate with the growth in our market cap and it’s consistent with Canadian comps.

My take away. This was for flexibility. They have plenty of cash and don’t plan on raising more barring something unforeseen. Same reason as I have a home equity loan.

Tobias Re: Magento which adobe purchased.
Not a threat, not competition, currently a mess. Adobe, good company, might be able to make magento into something which time and lots of cash.

Platform, - cloud migration will set them up to grow faster with less expense. Most mature part of the business.
International - early innings, still figuring it out, enormous opportunity with long time horizon - least mature.
Shopify Plus - started investing years ago and now paying off. Mid- maturity

My take:
Shopify continues to move away from being SaaS business. Merchant solutions - the add ons that business pay for to use continues to be a larger and larger part of revenue. Much of the companies focus is on adding in solutions that decrease friction and are cost effective for their customers. MRR continues to matter less and less other than it is an indication of how many customers are subscribing to the platform. Here they seem to have plateaued in their increase in MRR, hovering around 3 million sequentially per quarter over the last year. I suspect we are seeing the limit of how fast they can add customers and until the international expansion really kicks into gear we may see this number slide some. They are growing their revenue faster than gross merchant volume which implies to me that they are taking more of a percentage of their customers revenue in the form of merchant solutions (shipping, hardware, etc) This is a trend that can’t sustain forever.

Much angst in the form of digital ink has been spilled over their increasing expenses and decreasing margins. Lets not forget they warned us about this when they began their transition to the cloud. They are still running their own servers, duplicate costs are still being incurred. This is temporary and we should see the situation improve by the end of the year. They will be a more agile business for making this change.

Shopify plus continues grow like a weed. 91% and about 16% sequentially. I agree with the many posts we see here that this is an important part of the business to watch and I suspect will provide a large portion of the growth in the near to mid term.

Shopify international is what I suspect to be our mid term to long term path to growth. They aren’t saying much and so far most of the international growth seems to be in the shopify plus bucket.

Shopify has soooo many moving parts now. They are much more complicated to look at than many of our other companies. I’ve purposefully left out many of the smaller moving parts that just don’t matter at the moment. So those of you that follow SHOP closely, please add them in if you feel differently. My short takeaway is, businesses are moving online. SHOP is the place to do that. SHOP is moving toward more stuff that physical businesses will use. More people will use SHOP in the future. I still think this is an attractive business to be part of. They WILL grow slower in the future.

Market cap is around 14.4, about 1.6 billion of assets. TTM revenue of 853 gets us an EV/S at 15.3. Lets assume 40% growth so Forward EV/S of 10.9. Lets say the market doesn’t want to pay EV/S of 16+ for them anymore. 40% growth gets them revenue of 1.2 billion in 12 months. At EV/s of 10 and 14 their stock price would be 120 and 168 respectively. Lets use those as our low end. On our high end but still being reasonable lets say 50% growth, with the same EV/S range. 128 and 180. To be honest I think the company will do in the 50% range. Who knows what the market will pay for it. This is one of the better value points in the last 6 months to buy SHOP.


Darn it, I hit the send button accidentally while I was formatting the post.

Part of my take away didn’t make it, this was supposed to be part of the paragraph that starts with, “much angst”.

Shopify continues to spend to drive their growth. We won’t have a great idea if their spending is sustainable until we reach the end of the year and can see what expenses are when Shopify isn’t double spending on servers and cloud. The market reacted negatively to the earnings because people are suspecting that SHOP is needing to spend more as a percentage of their revenue to buy growth, which can quickly become unsustainable.



Given the drop in the stock price and the exodus from the stock by Saul and others on this board, I’d like to add just a bit to your review.

I think that the company has informed us that 50% growth is over. If one takes the guidance into consideration, it implies growth of about 33% in Q4 this year that, in my opinion, is the primary culprit in taking the stock price down and why Saul others have sold the stock.

If Shopify’s growth is slowing down that fast, how can it justify such a high multiple?

Here are the numbers with September and full year guidance as well as the imputed numbers for December:

Rev	Mar	Jun	Sep	Dec	Tot
2015	37.3	44.9	52.8	70.2	205.2
2016	72.7	86.6	99.6	130.4	389.3
2017	127.4	151.7	171.5	222.8	673.3
2018	214.3	245.0	__255.0	*295.7*__	*1010.0*				
Grth	Mar	Jun	Sep	Dec	
2016	94.7%	92.9%	88.6%	85.8%	89.7%
2017	75.2%	75.0%	72.2%	70.9%	72.9%
2018	68.3%	61.5%	__48.7%	*32.7%*__   *50.0%*	

Somehow, I cannot imagine that growth is going to slow down less than 33%, because Shopify usually beats their guidance. However, dropping from 68% in Q1 to under 40% in Q4 is quite a fall, especially with international expansion, Shopify Capital and Shopify Plus such potential future catalysts for growth.

Here is a table that shows historical valuation:

Mar-15							-0.12	-0.06					39.3				
Jun-15							-0.06	-0.03		$42.13	$24.11	$33.95	53.0				
Sep-15							-0.06	-0.03		$41.11	$22.70	$35.20	75.9				
Dec-15							-0.08	-0.01	-0.13	$39.29	$24.06	$25.80	78.0	9.8	13.6	8.3	8.9
Mar-16	12.8	1.4	11%	2.7	1.0		-0.11	-0.06	-0.13	$28.78	$18.48	$28.21	80.5	9.4	8.9	5.7	8.7
Jun-16	14.4	1.9	13%	3.3	1.3		-0.10	-0.04	-0.14	$32.39	$24.96	$30.76	81.3	8.9	8.7	6.7	8.3
Sep-16	16.3	2.4	15%	3.8	1.5	9.2	-0.11	-0.02	-0.13	$45.20	$30.00	$42.92	84.9	11.1	10.4	6.9	9.9
Dec-16	18.5	3.1	17%	5.5	2.2	14.7	-0.10	0.00	-0.12	$45.45	$37.74	$42.87	89.1	9.8	9.4	7.8	8.8
Mar-17	20.7	3.5	17%	4.8	1.8	19.0	-0.15	-0.04	-0.10	$73.00	$42.14	$68.09	90.2	13.8	13.9	8.0	13.0
Jun-17	23.7	4.3	18%	5.8	2.2	37.2	-0.15	-0.01	-0.07	$100.80	$67.22	$86.90	94.3	16.1	16.6	11.1	14.3
Sep-17	26.8	5.3	20%	6.4	2.4	44.1	-0.15	-0.01	-0.06	$123.94	$84.80	$116.49	98.8	19.8	19.4	13.3	18.2
Dec-17	29.9	6.3	21%	9.1	3.5	39.7	-0.03	0.15	0.09	$120.69	$89.35	$116.49	99.5	17.2	14.0	10.4	13.6
Mar-18	32.5	7.0	22%	8.0	3.0	60.4	-0.03	0.15	0.28	$154.82	$101.02	$124.59	102.3	16.8	16.8	11.0	13.5
Jun-18	35.3	8.1	23%	9.1	3.6	68.5	-0.23	0.15	0.44	$175.11	$112.50	$145.89	106.0	18.1	19.6	12.6	**16.3**

Shopify is historically expensive, even after the selloff and the P/EV range has been pretty wide. At a price of $142, the ratio is about 15.8, which is at about the middle of the range in recent quarters but still pretty high historically.

Given the lower expected growth rates, it would not be surprising to see another 15% - 20% drop in the share price. As we’ve seen with the historical ranges, it would be reasonable to expect that we will see such a price.

However, as Shopify Plus and international expansion gain momentum, this should have a mitigating effect on the potential downside.

Right now, Shopify makes up about 9% of my portfolio. On the one hand, I feel like I want to lighten up as a result of the changing growth rates and the opportunity to put more money into MDB, AYX and ZS. On the other hand, I really like Shopify’s chances to grow really big in the future, and I can still see the share price double 2 to 3 years, perhaps even more due to the company’s optionality.

Given the fact that I understand the business pretty well and feel good about its future, I’ll probably keep the shares I own and ride this out, looking for some dips to add at better prices. I don’t want to be too influenced by my fear of missing out on the nearly 100% annual returns that some on this board are earning. Sometimes I have to remind myself that I shouldn’t be embarrassed being up only about 45% so far this year. Besides, there are still a few companies that I need to weed out before I sell Shopify.