SHOP - What will SHOP be worth in 2023

Attached is a well-reasoned article urging caution about buying SHOP based on valuation concerns. There are also numerous comments from people who still thought the stock was rated a BUY.

I’m curious if people still think SHOP is a Buy at these prices.…


Two things from the article jumped out at me. The first is the claim that Shop has no moat. Moats can be hard to define. Coke is just as soft drink right? Well lately I think they are throwing some booze into something or the other, I don’t drink Cokes so I am not sure. But any old company can make soft drinks, so no moat right? Yet we all know that is not true, Coke has a moat and it is called brand identity.
Shop has a moat because they are number one in their market and growing. They are the go to place to establish an eCommerce web site. Amazon chose not to compete with them and instead uses them. To me that is a moat. The second thing that I saw was that this article uses an operating margin of 20 percent in the out years. There are a lot smarter people than I am on this board so I hope some will comment on this but I think for a software company 20 percent operating margin seems very low. I feel like that margin should be in the 40 percent range. On this, as I said, I am unsure and would appreciate other opinions but if that margin is increased even to 30 percent it makes a lot of difference.


My two cents:

Regarding topline growth, Scenario 1 OR BETTER is by far the most likely scenario. Shopify has done:

FY15: ~99% Y/Y (I don’t have full FY14 data)
FY16: 90% Y/Y
FY17: 73% Y/Y

FY18F: 49% Y/Y - w/ Q1’18 at 68% Y/Y… the 49% number will be blown out of the water and may be closer to 60%+ than the 55% assumed in the most rosy scenario by the author.

I think all other scenarios need to be thrown out. All are way too pessimistic for such a high growth, subscription type company with all the special attributes of Shopify.

Regarding EPS, it seems the data is not adj-EPS. This is fine I guess… but analysts, etc. typically look at adj-EPS when analyzing PE ratios and valuation. Additionally, I think the profitability assumptions are way understated. Even with aggressive opex growth assumptions I am much higher in my model for 2019 and 2020 (non-adj EPS). Bert indicates the same in his well written comment:

“Obviously the numbers in your analysis work. Math is straightforward enough. But why you think that SHOP has no competitive moat is beyond me. It is easy enough to look at the differences between what SHOP offers and what is being sold by Magneto and by Weebly. You will find many reviews that suggest the differentiation between the offerings. The fact the Magneto is not a hosted service alone might suggest just how different the offerings are. I am not too sure what you think moats are in the software world. They aren’t ditches in from of castles, but they consist of specific features and functions that make products easy to use. If you read the product reviews, it will become apparent that SHOP’s competitive differentiation is quite substantial and not being attrited.
Another problem with your analysis is the issue of terminal profitability. This is a subscription company whose revenues generate through sales volume and software subscriptions. If it weren’t growing substantially, it would very rapidly become highly profitable. That is why investors are willing to pay so much for subscription and other forms of recurring revenue. I suggest that what most people who invest in this company are thinking about is a much slower degradation in percentage revenue growth and a much greater terminal operating margin. That will take the anticipated return to very strong levels indeed-believe me, instiutions who own these shares have gone through countless cases/scenarios before they have commited to buy shres at current levels. They have far greater resources to engage in that kind of analysis.”

I think an eventual PE in several years of 40 is an OK assumption (no one knows, this value piece is the hardest thing to predict in investing) but I think the revenue and profitability will be at Scenario 1 or better which would indicate the ~14% annual return the author provides as conservative. Obviously anything CAN happen but outside of greater economic issues, etc. I feel comfortable considering most of the scenarios outlined in the article as very low probability and worth the risk of investment.