https://investors.shopify.com/Investor-News-Details/2019/Sho…
Solid growth at impressive scale ($390.6 million in this quarter alone), but one has to wonder why a $37 billion valuation is warranted.
Still, the growth isn’t falling off a cliff, much like we’ve already seen with MSFT and other bellwether stocks who have reported.
Looking forward to TWLO reporting tomorrow. And AYX and PINS on Thursday!
Bear
One other note from SHOP is their continued negative EPS:
Adjusted net loss for the third quarter of 2019 was $33.6 million, or $0.29 per share
It’s almost uncanny that they’re still losing money at this scale. I don’t know how many of our companies will be able to get away with that when they reach the size of SHOP. TWLO is almost there and last quarter (even at a slightly smaller scale – $275m revenue for the Q):
Non-GAAP net income per share attributable to common stockholders, diluted, of $0.03
TWLO isn’t exactly a paragon of profitability, but compared to SHOP they’re printing money.
Bear
->This report is not all negative, this is lots to like here. Shopify had a larger loss mostly because of a special item:
Net loss for the third quarter of 2019 includes a tax provision of $48.3 million. This provision is primarily due to a one-time capital gain triggered by the transfer of regional relationship and territory rights from our Canadian entity to regional headquarters, which allows us to develop and maintain merchant and commercial operations in their respective regions as we expand internationally.
->With a 1.5B annual run rate, Shopify growth rate is still impressive.
Third-Quarter Revenue Grows 45% Year on Year
→ Global growth is powering the company to new high.
Shopify Now Powers Over One Million Merchants Worldwide
“More than a million merchants are now building their businesses on Shopify, as more entrepreneurs around the world reach for independence,” said Tobi Lütke, Shopify’s CEO. “These merchants chose Shopify because we’re making entrepreneurship easier, and we will continue to level the playing field to help merchants everywhere succeed.”
Subscription Solutions revenue grew 37% to $165.6 million.
->Strong balance sheet to power growth and international expansion
At September 30, 2019, Shopify had $2.67 billion in cash, cash equivalents and marketable securities,
->Many moving parts and game changer: Would some sellers rather Shopify than Amazon to protect themselves?
Shopify Fulfillment Network continued to lay the foundation for timely and affordable direct-to-consumer fulfillment for merchants that value their brands and customer experience. With strong interest from merchants, we will continue to add select merchants and partners as we focus on high performance and optimize for the merchant experience.
Shopify completed the acquisition of 6 River Systems, Inc., a leading provider of collaborative warehouse fulfillment solutions.
Shopify announced availability for merchants in most U.S. states to start selling hemp or hemp-derived cannabidiol (CBD) products on our platform, both online or in brick-and-mortar retail locations.
Shopify launched native language capabilities in Turkish, bringing the total number of languages in which the Shopify Admin is available to 19.
Shopify launched Shopify Payments in Italy, expanding the availability of Shopify Payments to 14 countries.
Shopify Shipping adoption continued to expand, with approximately 44% of eligible merchants in the United States and Canada using Shopify Shipping in the quarter.
Purchases from merchants’ stores coming from mobile devices versus desktop continued to climb in the quarter, accounting for nearly 81% of traffic and 71% of orders for the three months ended September 30, 2019, versus 77% and 67%, respectively, for the third quarter of 2018.
Shopify Capital issued $141.0 million in merchant cash advances and loans in the third quarter of 2019, an increase of 85% versus the $76.4 million issued in the third quarter of last year. Shopify Capital has grown to approximately $768.9 million in cumulative cash advanced since its launch in April 2016 through the third quarter of 2019, approximately $166 million of which was outstanding on September 30, 2019.
->Forecast is still going up, with best quarter to come:
Revenues in the range of $1.545 billion to $1.555 billion
For the fourth quarter of 2019, Shopify currently expects:
Revenues in the range of $472 million to $482 million
I don’t know how many of our companies will be able to get away with that when they reach the size of SHOP.
I’m not sure either. SHOP now sits after today’s drop and factoring the new quarter at an EV/S of 22.1x trailing. My guess is the market gives SHOP a pass on profitability based on their TAM/CAP which seems to be easier to grasp than many others. People can easily relate to the transition from brick and mortar to online buying and even feel that taking over the retail experience. Everyone does it.
Amazon led the way and investors saw how long it took Amazon to turn a profit. Maybe this is playing into the fact the market is giving SHOP a pass on profitability.
Finally, Amazon has helped many businesses but at the same time has created a conflict, many times finding out what sells best on their platform and making it themselves. SHOP has not such conflict and is a pure source for e-commerce businesses to control their own destiny.
SHOP’s competitive advantage and total market smack the investor right upside the head without having to be a techie. Very easy for everyone to understand.
I’m not suggesting all will turn out well with Shopify, but merely trying to define differences between their business and others in the SaaS world.
A.J.
I’m not sure either. SHOP now sits after today’s drop and factoring the new quarter at an EV/S of 22.1x trailing. My guess is the market gives SHOP a pass on profitability based on their TAM/CAP which seems to be easier to grasp than many others. People can easily relate to the transition from brick and mortar to online buying and even feel that taking over the retail experience. Everyone does it.
Amazon led the way and investors saw how long it took Amazon to turn a profit. Maybe this is playing into the fact the market is giving SHOP a pass on profitability.
Finally, Amazon has helped many businesses but at the same time has created a conflict, many times finding out what sells best on their platform and making it themselves. SHOP has not such conflict and is a pure source for e-commerce businesses to control their own destiny.
SHOP’s competitive advantage and total market smack the investor right upside the head without having to be a techie. Very easy for everyone to understand.
I’m not suggesting all will turn out well with Shopify, but merely trying to define differences between their business and others in the SaaS world.
A.J.
Yes, SHOP seems like Amazon 2.0 with a clear path for great growth for many years. It’s still less than 4% the size of AMZN and AMZN is projected to have 20% revenue growth this year! So it seems logical for the market to give SHOP a premium valuation. An EV/S of 22 isn’t terribly high when the S is growing rapidly and will do so for a very long time.
Dave
I am long on Shopify; made my first and only investment in Jan. '18 at $129.31/sh. I am locked in for the long term and will begin to more actively scrutinized my Shopify investment around 2022-2023 when I anticipate that Shopify will begin to emerge from their “Product Market Fit Stage” and embark on their “Growth Trajectory Stage”. It is one of my “Set It & Forget It” investments. With prospects for Shopify to be the “next Amazon”…yada…yada; it has expectations for enormous growth built into its valuation which results in crazy volatility. There are a few of these “ostrich” stocks that I own where I tend to just stick my head in the sand during earnings season so as not to get too low or too high during these interim periods that may distract me from my long term investment plan.
I have bought into the thesis that Shopify is focused on building out a platform that will eventually scale internationally to facilitate and perhaps lead the borderless retail movement. Their focus to date has been on a point of sale software that focuses on the merchant while others such as Amazon, Alibaba, eBay, etc. have focused on the consumer by driving traffic to products, using a consumer facing domain website that then imposing a substantial take-rate on the merchant/vendor for securing the sale; typically the take-rate is approximately 26%. Compare that to the Shopify take-rate charged to merchants/vendors that averages somewhere between 2%-3%. With this model, Shopify currently has in excess of 1,000,000 merchants as their customers. Similar to the programmatic advertising market; I sometimes think of Shopify as being a Supply-Side-Provider (SSP) and the likes of Amazon, Alibaba and eBay being Demand-Side-Providers (DSP).
At this point in the process, I find myself accepting of the fact that Shopify is not profitable and most likely will not be profitable for at least 12-16 more quarters. Shopify is investing heavily in the backend of their business; creating a platform and providing tools for merchants worldwide to serve the merchant and provide an efficient and lower cost process for these merchants to compete on the worldwide stage on an even playing field with the largest of companies.
Shopify has been spending aggressively; building out a new fulfillment center and the Shopify Fulfillment Network that will speed up deliveries for their merchants and do so in a cost effective manner; planning to bring approximately 7 warehouses online this year; acquiring 6 River Systems to add robot fleets to the Shopify Fulfillment Network to increase productivity; and acquiring Handshake, a B2B wholesale purchasing platform that provides Shopify merchants with the opportunity to process sales directly without a third party marketplace.
As I read from a report from a paid subscription service, “Shopify has an excellent strategy in my opinion - which is to focus on the merchants. You can expect Shopify to undercut Amazon on the merchant costs while iterating until their fulfillment is on par. This is attacking Amazon on the flank, so to speak, rather than head-on by focusing on the customer. Therefore, with proper execution, Shopify has a viable competitive advantage.”
Is it too far fetched to think that Shopify could be entering the global backdoor to this e-commerce party, via the merchant and B2B platform that could eventually pivot to being more consumer facing with a domain website? Could Shopify become something by 2025 that barely resembles what it is today? Could e-commerce as we know it today be disrupted? Could Shopify become both a “DSP” and a “SSP”; creating an e-commerce market exchange for all goods and services for all B2C and B2B merchants and consumers?
Based on an old German legend, Rip Van Winkle slept for 20 years, awakening to an entirely new country he did not recognize. I think I am now calling Shopify my “Rip Van Winkle” stock! I am going to awake in 20 years to a totally disrupted e-commerce society! I’ll be 76 years old and either prepared to apologize to my grandkids that I made a terrible call, or be in a position to pay for all of their college educations.
Only time and patience will tell!
Harley
One other note from SHOP is their continued negative EPS:
Adjusted net loss for the third quarter of 2019 was $33.6 million, or $0.29 per share
It’s almost uncanny that they’re still losing money at this scale.
Maybe interesting only to me is that SHOP’s mkt cap is 4% the size of Amazon, but their sales are 0.5% of Amazon’s. You’re paying ~8x as much for each $1 of sales, and as you pointed out, SHOP has highly negative margins while Amazon’s OpMargin is 5.7% and then can increase that anytime they want, and have previously.
The behavior in SHOP stock is more than a little bit like BlackBerry’s [RIMM] was back in the day. And they made money!
Long AMZN,
Maybe interesting only to me is that SHOP’s mkt cap is 4% the size of Amazon, but their sales are 0.5% of Amazon’s. You’re paying ~8x as much for each $1 of sales, and as you pointed out, SHOP has highly negative margins while Amazon’s OpMargin is 5.7% and then can increase that anytime they want, and have previously.
The behavior in SHOP stock is more than a little bit like BlackBerry’s [RIMM] was back in the day. And they made money!
Long AMZN,
Less than 4% the market cap.
But SHOP is growing at more than twice the rate of AMZN and has much greater room for growth.
SHOP has a great product. RIMM had a horrible product - I know, I had a Blackberry.
Apples and oranges.
Oh how we love to roll out Amazon when discussing great companies and big winners and “bell-cows” for the companies we are invested in…
Lest we forget:
For a sense of scale, it took Amazon more than 14 years—58 quarters after its May 1997 initial public offering—to make, cumulatively, as much profit as it produced in the latest quarter alone.
RIMM had a horrible product - I know, I had a Blackberry.
RIMM had an amazing product that everyone on Wall St loved. They were the first secure network in the world you could call and send emails on. They were, literally, game-changing.
In 2002 they offered phone, email, texting, web faxing, web browsing, 5 years ahead of the iPhone’s release.
They didn’t have an $80bn market cap because of, lmao, ‘horrible products.’
At their peak they did over $20bn in sales. $5.6bn in peak quarter. 83 million subscribers.
$9.1Bn in gross profits ending Q2 of 2011. $4.6bn of OpIncome. $3.4Bn of Net.
They lost the innovation race to Apple as so many do, but they dominated their worldwide market for several years.
Your revisionist history is absurd.
BlackBerry was awesome in its day. A real lesson, as with Nokia, and AOL/Time Warner, as how world domination is not something carved in stone in the wilderness of the free markets.
Each, however also changed because of platform shifts. AOL fell when broadband replaced dial up. BlackBerry when email was pushed down the priority ladder to internet and smart phone. No,is when voice became less a priority than internet and smart phone.
So many vendors continue to lose out when others come in with the new cloud platform. Will 5G do the same, etc.
Good to understand how this works in terms of CAP analysis. It usually takes a new disruptive platform to unseat the old dominator. Roku provides the opening for many more channels that can compete with Netflix as does the smart tv platform, where before only Netflix could always be there.
Tinker
a big difference between SHOP and AMZN is - AMZN owns customers… they bring customers to their site by Prime… and other means…
SHOP is a back office service provider… tool kit provider… infrastructure provider… very impressive at what they do and certainly have loooong way to growth, but it is no way comparable to AMZN…
and this difference show up in ~2.6% cut vs ~26% cut… there is a reason small sellers pay that large cut to AMZN…
And today, a large part of AMZN valuation comes from AWS… (high margin, secular high growth, sticky infrastructure thats built for internal use and being leveraged to grab rest of the world’s cloud infrastructure spend)
without AWS, AMZN stock would have been in gutter for last 5 years… and there is no comparable to AWS at SHOP… if anything, SHOP is investing in physical logistics centers which is going to draw out huge investment for low margin revenue growth…
Can SHOP do things that can earn higher cut of each transaction, may be…
Can SHOP get to AWS like strategy… may be…
but at this point, none of these are visible… and yet investors justify lofty valuation comparing to AMZN…
all the while taking money away from true high margin, secular growth stocks like MDB, AYX and such…
Oh well… this too will pass…
https://discussion.fool.com/most-profound-sa-article-ever-341484…
Another SA article today, the same as before.
Tinker
Hi Nilvest,
I agree in principle that is tough to compare anything to Amazon, but I lost you when you used AWS as part of your reasoning.
Yes, it is true that AWS is a big part of Amazon’s value now, but for the first 20 years it was “over valued” the entire time due solely to it’s shopping site and very high sales growth and earnings losses.
In that way it is very similar to SHOP.
Randy
Long Shop and Amzn
for the first 20 years it was “over valued” the entire time due solely to it’s shopping site and very high sales growth and earnings losses.
Amazon went public in summer 1997, & had positive annual net income starting in 2003, their first profitable quarter was Dec 2001:
Amazon Annual Net Income
(Millions of US $)
2018 $10,073
2017 $3,033
2016 $2,371
2015 $596
2014 $-241
2013 $274
2012 $-39
2011 $631
2010 $1,152
2009 $902
2008 $645
2007 $476
2006 $190
2005 $359
2004 $588
2003 $35
RIMM had an amazing product that everyone on Wall St loved. They were the first secure network in the world you could call and send emails on. They were, literally, game-changing.
In 2002 they offered phone, email, texting, web faxing, web browsing, 5 years ahead of the iPhone’s release.
They didn’t have an $80bn market cap because of, lmao, ‘horrible products.’
At their peak they did over $20bn in sales. $5.6bn in peak quarter. 83 million subscribers.
$9.1Bn in gross profits ending Q2 of 2011. $4.6bn of OpIncome. $3.4Bn of Net.
They lost the innovation race to Apple as so many do, but they dominated their worldwide market for several years.
Your revisionist history is absurd.
There’s no need to be hostile. My post did not include any “revisionist history” and is entirely compatible with the history you described.
RIMM was ahead of the curve but then not only fell behind the curve, it fell off the curve. The Blackberry phone that I owned was by far, in every respect, the worst cell phone I have every owned. This fact, in my humble opinion, explains their demise.
The comparison to SHOP is not supported by any facts. There is zero evidence that SHOP is falling off the curve. Maybe it will. Maybe it won’t.
You’re welcome to believe otherwise and present evidence to support that opinion.
Cheers,
Dave
BlackBerry was awesome in its day. A real lesson, as with Nokia, and AOL/Time Warner, as how world domination is not something carved in stone in the wilderness of the free markets.
Each, however also changed because of platform shifts. AOL fell when broadband replaced dial up. BlackBerry when email was pushed down the priority ladder to internet and smart phone. No,is when voice became less a priority than internet and smart phone.
So many vendors continue to lose out when others come in with the new cloud platform. Will 5G do the same, etc.
Good to understand how this works in terms of CAP analysis. It usually takes a new disruptive platform to unseat the old dominator. Roku provides the opening for many more channels that can compete with Netflix as does the smart tv platform, where before only Netflix could always be there.
Tinker
Good call, and a timely reminder of the real risk involved with paying very high premiums for SaaS companies: the assumption is that their rapid growth will bring down valuations into more normal regions over time - which they will, provided their leadership position isn’t upset by a disruptive new technology or trend before that calculation works out.