Someone just brought up the SHOP valuation. The price has run up from $89 to over $120 in a few short weeks. Is it too expensive? Is it time to sell? Let’s look at that.
Looking backward, SHOP does seem expensive. It’s enterprise value is 20.4 times TTM sales. If you compare this to other fast growing tech companies you can see that SHOP is trading a much higher multiple of last year’s sales:
So is it too expensive? Should one sell or lighten up. My opinion is that it’s ok to hold SHOP even at the current stock price. Why?
The main reason is that I think that the revenue growth will continue and I would not be surprised if it does not decelerate at all.
Here’s the yoy revenue growth for the past 5 quarters:
92.9%
88.6%
85.8%
75.2%
75.2%
It decelerated a little but then held steady at 75.2% last quarter. But just looking at this might lead someone to expect a deceleration might be likely next quarter. It’s possible but I look at the following:
Merchant count for the past 6 quarters:
275000
300000
325000
377500
400000
500000
Now if you look at these numbers closely you will noticed something special happened last quarter. Look at the sequential increase percentage for the past 5 quarters:
9.1%
8.3%
16.2%
6.0% 25.0%
In one quarter they increased their merchants by 25%!!! Wow, that’s just amazing. Was this this a one-time spike or was it an inflection point to growth. We will get one more data point in about 6 weeks. Even if it was a one-time thing, we will see recurring revenue for that extra 25% kick in which will positively affect revenue growth. If we see merchant additions accelerating then we should see revenue growth reaccelerate and the EV/S to come down very, very fast. I haven’t sold a single share and I am optimistic about the current quarter…I’m looking for a substantial beat to guidance. So while the sales multiple may seem to make SHOP look expensive, I think the growth rate is so high that looking backwards at this multiple ignores where SHOP sales will be in short order.
In one quarter they increased their merchants by 25%!!! Wow, that’s just amazing. Was this this a one-time spike or was it an inflection point to growth.
This is the most difficult thing for me to assess with SHOP. I have no feeling at all for how many more merchants there are for SHOP to get - could be anything from “another 100k tops” to “sky is the limit” in my view. Like I do get a feel for how many homes you can sell around large cities in the US, or how many cars are sold around the world, even how much (or not-so-much) cloud will get used in the coming years. For online merchants I’ve got nothing…
This is the most difficult thing for me to assess with SHOP. I have no feeling at all for how many more merchants there are for SHOP to get - could be anything from “another 100k tops” to “sky is the limit” in my view. Like I do get a feel for how many homes you can sell around large cities in the US, or how many cars are sold around the world, even how much (or not-so-much) cloud will get used in the coming years. For online merchants I’ve got nothing…
How do you approach this?
stenlis,
I’ve thought about this. You are asking how much room to grow is left. I believe that SHOP has been mostly been acquiring small and medium sized business in the US. So you can Google “how many small and medium sized businesses are there in the US”. This will lead you to a number of websites with information about these business.
SMEs are the backbone of the American and European economies. The United States’ 30 million SMEs account for nearly two-thirds of net new private sector jobs in recent decades. SMEs that export tend to grow even faster, create more jobs, and pay higher wages than similar businesses that do not. T-TIP will enhance already strong U.S.-EU SME cooperation and help SMEs on both sides of the Atlantic seize job-supporting trade and investment opportunities.
30 million in the US with a lot of expansion in the rest of the world. You could probably stop here. SHOP has 500,000 now and is now just starting to go after large enterprises. I think SHOP is just beginning to dent the market potential. Sure of the 30 million a lot won’t be candidates so you can dig further into how many of these 30 million are in retail.
3,793,621 Retail Establishments
98.6% of retail businesses employ >50 people
There’s a lot more research that can be done, but I would say that SHOP has not captured anywhere near the majority of the market. And SHOP is making it easier to start a business so many more businesses will be created because SHOP exists. Add international expansion and entry into the enterprise market and you quickly see that they are conservatively still in the first 10% of the opportunity.
When I researched an article about SHOP the company had an investor presentation online that I used for some data. Here is what I found:
Shopify is a software powerhouse that in the most recent quarter reported 377,500 customers. That’s a small fraction of the 10 million small and medium-sized businesses in its current “core” geographic market (North America, U.K., and Australia), which are spending upward of $12 billion for web-related and back-end services, and the estimated 46 billion estimated business in the global available market of small an medium-sized businesses. The company originally targeted small to medium-size businesses, but with the introduction of Shopify Plus it is now scaling to larger brands such as Tesla and General Electric.
Yes, the article was published back in March so the numbers have grown since then.
I was just trying to point out the TAM that SHOP was showing in their 2016 slide deck, as I saw folks were trying to figure out what they thought the number of customers that may be available for the SHOP service.
Some insight into how many shops might make up the TAM.
Just a comparison which may be nothing more than oranges to apples. Consider that Etsy restricts sellers items and qualifications etc, that Shopify’s Revenue on a Q basis already exceeds Etsy, that the target customer is completely different or, that some Etsy sellers may migrate to SHOP.
Etsy reported
Supporting this growth in GMS, active sellers increased 10.9% to 1.8 million and active buyers increased 17.2% to 30.6 million at June 30, 2017 compared to June 30, 2016 .