Saul’s recent post on SQ and SHOP got my attention as SHOP is my largest stock holding at ~15% of my portfolio (SQ is 2nd largest at ~12%).

I took the SHOP drop in price to add to my holdings (which is why it is now the largest). After reading Saul’s post, I decided to do some deeper digging in my understanding of how SHOP makes money and what is going on with the company.

I want to start by saying I am no expert so if I misstate something please correct me. Let’s start with Annual Revenues. I got these numbers from a previous Saul post (2012-2016 and a press release 2017).

Year	Revenue in Millions	Percent increase in Annual Revenue
2012	24	
2013	50	108%
2014	105	110%
2015	205	95%
2016	390	90%
2017	673	73%
2018	1025	52%
*2018 is projected revenue for year	

Percent increase in revenue is definitely decreasing. However Bert Hochfield recently wrote an article saying there are only two companies with above 1 billion in revenue growing at ~60% (revenue this Q grew 62%) SHOP and SQ (I am paid subscriber to Ticker Target-btw I feel it is worth the investment). SHOP is definitely hitting the law of big numbers to a degree. We all know that any company as it becomes larger has a harder time acheiving high revenue percentage increases. However one thing concerning about was Saul’s post was the mentioning of moving away from a Saas type business and the effect that has on margins going forward.

I did some researching on SHOP’s revenue and where they come from and where the growth is projected to come from in the future. My brain hurts a bit as the company is diversified and it makes tracking the revenue and future potential growth a bit difficult. This is what I understand from my efforts. Again if I got something incorrect please correct me so that I can understand better.

Revenue in 2nd Q was 245 million (62% increase). Merchant solutions was 134.2 million (68% yoy) and subscription solutions was 110.7 (55% yoy). Definition of merchant solutions revenue from Shopify highlighted in italics.

We principally generate merchant solutions revenues from payment processing fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards online and offline. In addition to payment processing fees from Shopify Payments, we also generate merchant solutions revenue from transaction fees, Shopify Capital, Shopify Shipping, referral fees from partners, and sales of point-of-sale (“POS”) hardware. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform.…

Definition of subscription solutions from same source.

Revenue from subscription solutions is generated through the sale of subscriptions to our platform as well as from the sale of themes, apps and the registration of domain names. Our merchants typically enter into monthly subscription agreements

According to the earnings report the MRR (montly recurring revenue) side of solutions was 35.3 million (49% increase yoy). The MRR in subscription solutions would be considered the Saas business. Shopify Plus merchants accounted for 23% of this revenue or 8.1 million dollars, this was up from 18% last year.

According to this website…

There are 3 subscription levels Basic Shopify, Shopify, Advanced Shopify. They are priced at $29, $79, $299 monthly. Out of the 245 million in quarterly revenues, this is MRR portion or 35.3 million under subscription solutions (which had a total 110.7m this Q) minus the shopify plus portion, so if my math and understanding are correct 27.2 million (35.3m-8.1m) quarterly revenues from MMR subscriptions. Now this is the portion of revenue that Saul seemed concerned about? If so we are talking about 11.1% of quarterly revenues. Credit card rates and transition fees vary by plan (you can look at chart in link). The credit card rate fees and external payment gateway fees would go into merchant solutions revenue if my understanding is correct.

So what makes up the other 75.4 million in subscription revenues? (110.7-35.3m). Seems like Shopify Plus platform revenue and apps revenue. From the c.c.…

Shopify Plus platform revenue, which is the subscription revenue above what we can consider to be recurring, because it is linked to GMV, contributed slightly. The bigger contributor to the difference between recurring revenue and subscription revenue was apps revenue, which more than doubled over last year’s second quarter.

So how does Shopify make money from Shopify Plus? It has a floor fee of $2000 monthly and a cap of $40,000 monthly, but based on your montly store sales (GMV) 0.25% or if using Shopify Payments 0.15% of monthly sales. The reduced rate only applies to transactions using Payments, other gateways will be at the higher rate. Additional revenue is payment gateway fees? (Does this go to Paypal and others directly or does SHOP benefit?) App fees, the website above said their average spend per customer was 200 a month.

The monthly cap of $40,000.00 is what they are getting rid of going forward. So they will have even greater subscription revenues from that move in the future with just current customer base. However that will have no effect on the MRR. The MRR (according to my understanding of c.c.) is only the subscription revenue that they can count which is the floor of $2,000 monthly because anything greater is dependent/linked on GMV/sales.

GMV (Gross Merchandizing Volume) was reported at 9.1 billion (up 56%). This is important meteric for growth in merchant solutions revenue and for Shopify Plus as just explained. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. The amount of these sales that utilized Shopify Payments was 3.6 billion (increase of 66% yoy) or 39.5% of overall GMV for the quarter.

Gross profit margins on Shopify Payments, the biggest driver of merchant solutions revenue, are typically lower than on subscription solutions due to the associated third-party costs of providing these solutions. We view this revenue stream as beneficial to our operating margins, as Shopify Payments requires significantly less sales and marketing and research and development expense than Shopify’s core subscription business.

This important to understand as it effects the rate of subscription revenue from Shopify Plus. The increased growth rate of Payments, has had a drag effect on % revenue growth of subscription solutions. Getting rid of the cap on Plus should excellerate revenues in the future. GMV in future will be increasly important, which is seasonal due to nature of this business.

Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants facilitated through our platform. Our merchants typically process additional GMV during the fourth quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and that historical patterns in our business may not be a reliable indicator of our future performance.

On earnings call it was reported revenue from capital and shipping grew over 100% from last year. It was mentioned that these are both higher margin, anyone know what % margin?

This is getting to be a long post. However after spending a considerable amount of time researching this issue. I do not plan on adjusting my SHOP stock holdings. It will remain #1 position in my portfolio. I believe I will be rewarded in the future for this decision.


Retirementdough, nice post. I think you did a really nice job bring together a bunch of different info which encapsulates Shop quite nicely. I wanted to address the bear case though because I felt like your post didn’t quite speak to why I am a bit concerned about SHOP’s trajectory.

The reason we are focusing on MMR is not so much what percentage of revenue it brings in, but what MMR actually represents, which is how many customers SHOP has. All the merchant solutions to my knowledge require you to be a SHOP customer. So if MMR or customers slow down then eventually merchant solutions is going to slow down.

With that in mind let us look at MMR revenue which is as follow

Starting at
35.3 _________ 32.5_____29.9________26.8____23.7

Now lets look at the delta between those numbers
2.8, 2.6, 3.06, 3.14, 3 million,

So in absolute numbers their growth is slowing, not just in percentage

yoy tells the same story,
q2 2018 and going back 11.6, 11.8, 11.4, 10.54

Not great, but not totally either.

Now lets look at MRR minus shopify plus, which gives us 1.7 million in mmr growth in q2 2018 and 1.9 million for q1 2018. Now this number isn’t looking too hot, Since last year they were growing their MMR 2.2 million off of a much smaller base.

When saul said they were going from being a rocket ship to a race car I think he summed it up nicely. Shopify plus (as we all guessed a year ago) is the current growth driver, with international being the long term growth driver. It appear to me that the days of 70+% growth are long gone. They need customers to sell merchant solutions to. In fact unless they really kick butt with shopify plus it looks like next year revenue growth will clock in around 45%.

I don’t see the market giving SHOP the same multiples if they are growing in the 40-50% range as they have in the past. In fact we have already seen them fall to an EV/S around 16. I have no crystal ball nor any special insight other than SHOP isn’t kick butt as hard as they use to so I’m not interested as allocating as much money to them. One final thing, notice that this isn’t just one quarter of data. This is a trend that has been developing over the last year.

all the best,


Ethan thanks for the reply. I like to here the bear arguments. I can see that you have a point that is worth pondering/investigating.

Although I think of it somewhat like this. Company A has a revenue of 390m with a 73% growth rate or Company B has a revenue of 1.05b with a 45% growth rate. Which company will bring in the most money? Of course Company B which would expect 1.52B in revenues the next year versus 673m from company A. Of course this example is SHOP 2017 versus SHOP expected 2019 with 45% growth rate.

Another thought I had when reading this was I think we can figure out Shopify Plus customer #'s. If my conclusion is correct about only the 2000 floor being counted in MRR #. Then 8.1m (MRR for Shopify Plus)divided by 6k (3 mo at 2000) would equal 1350 Shopify Plus customers this quarter versus last year MMR of 23.69m and Shopify Plus 18% of that for Shopify plus revenue of 4.26m (? is this right) divided by 6K would equal 710 Plus customers last year.

If that is the case that would be 90% increase yoy in Plus customers.

The company stated the 3 areas of focus are Platform, International and Plus. They just started international focus and it has not add to revenue #'s yet. Although I do think this is where you will see the future MRR growth.

Another potential thought to why MRR is falling maybe(?) found in c.c. as well.

Ronald Bookbinder – IFS Securities, Inc. – Analyst

Good morning. Thank you for taking my question. The market seems to be concerned about churn and that you could possibly run out of potential merchants, but isn’t it true that entrepreneurs just aren’t one-and-done type of people, that the entrepreneurs will have multiple websites as they continue to try and figure out what works for them? Similar to Wayfair started off with 240 websites before consolidating down to one. What do you think is the average number of websites each entrepreneur has on your platform?

Tobi Lutke – Chief Executive Officer

Love the question, you’re exactly right. Again, the entrepreneur process is start up a bunch of things, and figure which one gets the traction, and then hopefully go all in on that one. Right? So, and involves a series of pivots and changes. I mean, this very business used to be a snowboard store, right? So here’s a – I can’t give you good numbers around it.

Of course, we have internal estimates on it, but it’s lossy because the way Shopify, probably one of the regrets I have when I wrote the initial version of Shopify, is that I didn’t really anticipate this sort of creation and trial, and therefore what I didn’t do is allow people to create one account under which you could create any number of stores and sort of track them against each other. If I had a time machine, this would be one of our little changes in the data model that I would have done. Now we will retrofit this, this is something we’ve already said we would do [ it tonight ]. So once we do that, we will have a much better idea because you can really sort of track the entrepreneur process across different attempts.

So this is like, the churn, there’s a lot of focus on it. And it’s really – we haven’t found the right language to describe why it’s simply not a problem. Like for instance, churn almost universally is actually the successful discovery of something that didn’t work. So, it’s a building block in this process toward being successful, creating something, just as you said.

In fact, this actually isn’t even so concentrated on the very beginnings. So, what we also see is that even with the Plus store, they add a new product line, maybe a new – let’s say a fashion store adds a new collection. This goes into the main store, but what we will do is actually create a completely separate account, a separate site, just built around the one collection as almost a landing page for their marketing campaign, for some kind of real-life activation and so on. So, even that process continues throughout the line.

So it’s an interesting component, and it’s one of our reasons why just looking at Shopify purely through units, it’s a very lossy picture. I’m violently agreeing with you, is what I’m saying.

Is it possible that some business actually had multiple SHOP subscription to segregate different parts of their business, but with SHOP Plus they are just consolidating it under one account? I do not know probably a reach of a thought.

I do not want to come off as SHOP homer. I like hearing where my thinking maybe flawed. Keep the alternative views coming. Obviously my mind is deep in SHOP thought this weekend.


However Bert Hochfield recently wrote an article saying there are only two companies with above 1 billion in revenue growing at ~60% (revenue this Q grew 62%) SHOP and SQ

I think this is an interesting point. Without wanting to speak for Saul or anyone else embracing the Saul method approach, effectively it leads us to the potential conclusion that if Shopify at over a $1bn revenue company no longer makes the cut with 50% growth then really we are saying that with the only exception of SQ, $1bn+ revenue companies are effectively out of the picture for Saul method investing.

Are we really that unsatisfied with $1bn+ revenue companies effectively being too big to grow fast enough for our liking?

The result of that is that we are left with 1) small companies and 2) largely unprofitable companies as increasingly American firms seem to be needing to get to $1Bn and beyond in the technology space before they become profitable (a la Shopify and Pure Storage etc).

I’m all for ruthless allocation of capital but this seems to me leading to very skewed growth investing in terms of company market cap and profitability lifecycle stage.

Just pondering aloud.


ruthless allocation of capital

I love it!

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That is the American way! “Ruthless allocation of capital”.

This said, moving away from ANET, NVDA, and SHOP, as I did earlier this year, has been highly profitable. As I wrote on another thread, ANET may return to better returns in the future given it may get back to more linear growth that looks prettier.

I do believe NVDA will again return to great returns as well, perhaps as earlier as the upcoming earnings call. But it cannot be denied ANET and NVDA have underperformed this year.

SHOP…has actually performed better until the recent price collapse. I really, personally, no longer am into SHOP now that it is larger. I have never trusted SHOP obtaining millions of profitable small vendors, and according to Duma’s calculations, SHOP is performing only to expectation in regard to Shopify plus, and not exceeding those expectations.

One would think that cornering the pot market might be an upside surprise at some point.



One slight adjustment to Bert’s statement (and Bert is a huge fan of the stock): NTNX currently has a TTM of $1B+ and grew revenue by 65%+ when adjusting for the elimination of passthrough hardware. It is somewhat hidden (vs. headline of 41% revenue), but bookings were also 65%+, so the growth is very real. And also with 73%+ gross margins, NTNX is in a rare class indeed.

I realize this is a SHOP thread, but I don’t think NTNX is getting the respect it deserves compared to SQ and SHOP. It has a 2018 EV/S of only 6.5, and is basically growing as fast as any stock in the Saul universe.



Stephen - FWIW I agree on Nutanix and after this Q once the hardware biz model switchover is all but concluded the value in this will out I believe.

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I saw this post in the “Best of” and you are obviously an expert on this topic - very detailed and researched. Having said that, I am so out of touch because honestly, I have never even heard of Shopify. If it is an on-line shopping website, I almost never make purchases on the web so that must be the reason. Just sayin’.

ANET and NVDA have underperformed this year. Follow the money is usually a good rule.

I got out of ANET, but recently got back in , underweighted. I was overweight NVDA, cut back to standard weight, but even that was a lost opportunity since NVDA price has gone nowhere. Still I believe in Nvidia’s prospects but will have to decide based on coming earnings and market response to them.
Some growth companies will never be rewarded with a high P/E . And P/E can go up faster than earnings so that is often the best bet.

Knowing when to sell is harder than knowing when to buy.