SHOP - The Investment Thesis

Investment Analysis Clubs Saul’s Investing Discussions
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While we all await round 2 of Left’s short thesis that he has promised us, please allow me to further opine on the previous valuation commentary and more specifically what I personally would like to see from SHOP…hey if you’re listening Tobi :wink:

There has been a great deal of discussion about the quality and durability of the customers and whether 500,000 means anything given the perception of 40% fail rates in ecommerce businesses on the SHOP platform.

I tried to go back to the previous earnings calls and primary source the 40% figure and didn’t see where that came from so if anyone can point me to the actual horse’s mouth, would be much appreciated.

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

  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 to account for 44% of subscription revenue but represent only 4.5% of customers!!

So IMO, what we want from SHOP is to, IN FACT, report the merchants and their breakdown…these latter two are the most valuable to SHOPs bottom line and may be more indicative of future growth and profitability and recurring high margin revenue.

I don’t believe the criticism of SHOP’s lower quality or drop customers is going to be relevant in the end and quite honestly, it wasn’t a bad strategy to market the initial services to the underserved but then as the business matures…to place more emphasis on the latter two customers…if they don’t get bogged down with low end customers.

So Tobi, if you’re listening, go back to reporting customers and the breakdown into the 5 categories. Also, give us the attrition for each level…I would speculate that the attrition rates for the latter two will be the lowest.

The number 1 reason for failed businesses is lack of capital…and the low bar set for the first three subscriptions just seems to encourage the weak and vulnerable that most likely are frail and will fail. The business education program alone seems indicative of simplistic learning that suggests a very unsophisticated merchant at these levels…ecommerce on Shopify doesn’t fix bad business strategy, operations and capital needs.

I really don’t see the concern about the partnership program and paying the $2,000 finder’s fee since it appears these referred merchants seem to be better vetted if Tobi is to be believed…hence presumably less attrition and better businesses with recurring revenue to SHOP. This is of course assuming that the relationship is disclosed to the potential merchant.

Lastly, please STOP the business loans…it just doesn’t look good when you offer credit to the very merchants using your services and being counted as another notch in the belt…sounds altruistic but it looks odd and you are not a bank…stay with your core competencies.

How then does SHOP combat Left’s Round Two Short Attack??

Transparency transparency transparency! Show us the numbers!

The investment thesis remains intact if:

  1. The latter two customers grow at a substantial rate and have low attrition…huge revenue from a much more manageable merchant pool.
  2. Maximize subscription revenue which should have best margins.
  3. Eliminate any perception of fraud related to business loans (Shopify Capital) to customers
  4. Service the smaller lost leaders if you want but do not emphasize this group because they are enormous risk, high maintenance and high failure rate category.
  5. Expand B2B business
  6. Laser focus your sales staff on the Plus and Advanced customer.

Hard to be critical of Tobi’s accomplishments quite honestly but, what perhaps started as a tool to help a micro-entrepreneur to access ecommerce, may be better morphed into the more medium size merchants who more likely get SHOP to the promise land.

I reserve the right to be mistaken as usual and the above in no way addresses my prior concern about valuation stock SALC/TALC disconnect.

Peace:
Duma

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The number 1 reason for failed businesses is lack of capital

For B&M, that may be true, but for internet businesses, the capital requirements are limited. For internet businesses I suspect the prime causes are 1) marketing, i.e., whatever one does to attract people to the site and 2) lack of a compelling offer, i.e., a me too offering of products which one can get anywhere, possibly for a better price.

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Facebook was started in a college dorm room by Zuckerberg. There’s no way of knowing which start-ups might fail and which might grow into significant companies. Whatever breakdown we might see from SHOP today is unlikely to predictive of which particular start-ups will succeed.

I think Tobi understands this from his personal experience. Remember, Shopify grew out of an effort to sell snowboards online. Tobi did not have an initial vision of an SaaS business.

I understand your desire for “transparency,” but I would caution that meaningful transparency is really the goal. If SHOP reports the numbers you desire, what do you do with them? Are they the metrics with which to make buy/sell decisions? I would be hard pressed to sell SHOP if I saw an abundance of Shopify Lite accounts, in fact that’s exactly what I would expect. So what if there’s an 80% failure rate within five years (or one year or whatever), this is the normal course with small businesses? The issue is really about how well the remaining 20% succeed. I don’t believe (personal opinion) that churn is a big issue. For every failure there’s going to be two or more start-ups to take it’s place.

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