Kinda sorta, according to this podcast…
https://www.gimletmedia.com/reply-all/117-the-worlds-most-ex…
I own it, but don’t think I fully realized how their business model works. This does not seem to be sustainable. Reconsidering.
3 Likes
Todd, as most know my portfolio tends to be quite concentrated. It was the reasons evidenced in this great podcast as to why I sold off my SHOP shares. It was half my port at the time. I moved it into ANET and NVDA.
The future of SHOP is Shopify Plus, not dropshippers. I found the narrative SHOP was spinning to be misleading as it promoted the high growth of its merchant numbers. As the number of merchants in total really meant little. What mattered was the quality of the merchants. And SHOP would not break that info out for us.
SHOP management understands this and that is why they are (1) taking $500 million or more per year in secondaries and (2) now focusing like a laser on Shopify Plus and high quality merchants.
As suspected, very few of the lower level merchants move up to Shopify Plus.
What is SHOP worth when the drop shipping craze crashes? That requires valuing Shopify Plus. Duma has done some work on this.
Tinker
8 Likes
Same thing people said about Alibaba. Same reason Ackman shorted herbalife. Everything business has risk. We just need to bet on the probability.
The story, and investigation, was a great read.
But drop shipping isn’t their business model, but some of their customers use it. Amazon has drop-shipping as well - you order off Amazon and it comes straight to your door from China. What percentage of Amazon sales come from these drop-shippers? I’m not sure.
I think it’s good to ask questions and ponder these sorts of things, but there are many counter-examples of traditional merchants using Shopify to create a meaningful online presence.
Here’s a different example of a Shopify merchant, posted last week on this board:
"This is a large international wine distribution operation with Singapore’s largest retail chain of off-licenses that has set up its online presence on Shopify and using some of the premium payment solutions.
This is not a random drop shipper, nor a single site restaurant with online brochureware, this is a large physical distributer and retailer based here in Singapore that has chosen to go with Shopify."
http://discussion.fool.com/another-shopify-use-case-singapore-32…
David
5 Likes
David,
Drop shipping is a legitimate business. No doubt. My only issue is how much growth in drop shipping business is built into the expectations of the stock?
We always follow merchant growth. More than 500k merchants, more than 600k merchants. These metrics get built into the price of the stock.
There is a limit to the number of drop shippers. This is not like Amazon selling product to consumers, when you have the entire world of people to sell to, and each purchase does not make it more difficult for any other consumer to purchase.
SHOP sells to the sellers, and as we all know, in a competitive economy, there are only so many sellers one can have in the market. This will hit a limit. And therefore merchant growth numbers will not just continue to the sky.
To the extent SHOP is valued on this expectation, I had troubles with the investment.
To the extent it is valued on businesses like the wine shop, or any business in Shopify Plus, I have no problems, other than we don’t really know who and how well SHOP is competing for these high end customers, and SHOP does not do a terribly good job of breaking down the customers for us.
Thus, making it difficult to separate out the portions of value.
No more will I say, because obviously I have said it a lot. A material part of SHOP’s value is based upon merchant growth numbers, growth numbers that are not sustainable because of exactly what was stated on the podcast. Same thing happened with eBay when that was all the rage.
When that hits a wall, what is the rest of SHOP’s business worth? Could be, that by the time this happens, it will be worth quite a bit more than it is today. I just do not like the uncertainty when one cannot clearly define the value proposition here, and SHOP is not making that easy for us.
As such, not danging SHOP, just trying to better understand the business and the value.
Thanks for input all.
Tinker
7 Likes
Kinda sorta, according to this podcast…
https://www.gimletmedia.com/reply-all/117-the-worlds-most-ex……
I own it, but don’t think I fully realized how their business model works. This does not seem to be sustainable. Reconsidering.
I had just listened to this podcast (Reply All is one of my favorites) on my morning dog walk and was about to post my thoughts on it.
I now certainly understand where the idea that Shopify is a Ponzi scheme came from previously. While I don’t think Shopify itself is there certainly is a thriving Ponzi drop shipping business that is supported on the platform. I would encourage anybody to listen to the Podcast at about 30 minutes. It outlines how interconnected Shopify, AliExpress, Oberlo, Youtube,Facebook and Integram are in a world of get rich online retail marketing works. This also explains why Shopify Consultants are in a lot of demand.
Most of the drop shippers are not really providing a value-add service but just following for Youtubers that explain how to setup your own dropship business. Soon they realize the money they thought wasn’t there, they end up paying consultants and join communities for drop shippers to learn the best tricks of the trade.
They even have conventions in places like Bali. Those that learn to do it well, actually start making more money teaching and doing their own Youtube videos.
Now, is Shopify a Scam? I don’t believe so. As Tinker has pointed out, I think what is important moving forward is to see how Shopify Plus grows. There will probably always be a large number of these drop shippers jumping in and out of the platform. There will also be a large number of growing businesses like Straits Wine that Ant pointed out. I also live in Singapore and they operate a small chain of mid to high-end wines across the island. Probably the second biggest independent Wine retailer here behind Wine Connection. I shop there from time to time, they are certainly legit. Shopify will be determined by how these type of companies do and not from the constant churning of the drop shippers.
Here is the article that triggers the Podcast:
https://www.theatlantic.com/technology/archive/2018/01/the-s…
9 Likes
Shopify Plus revenue grew in dollars by 111% yoy. I think they’ll do okay!
Saul
For the calculation:
Last year total revenue = $100
Shopify Plus was 17% of that = $17
This year total revenue was up 71%, so total revenue = $171
Shopify Plus was 21% of that = $36
$36 is up 111% from $17
20 Likes
Todd are you really Andrew?
1 Like
Guys - Can we get some freaking perspective?
- There is nothing wrong with drop shipping it is not malpractice get the association as a dirty word out of your minds. It’s a fast growing sector. Businesses usually are looking to play in fast growing sectors.
- Massive multinationals do drop shipping on a routine basis.
- Shopify sells to everyone with every kind of business model from cannabis in Canada to drop shipping in China to selling wine in Singapore. They are at the top of the pyramid and can benefit across the board without the risks.
- Every successful internet enabling company sells to drop shippers - Amazon included. Is Amazon a ponzi scheme - come on is it? I want to see the guys posting about Shopify’s ponzi scheme ask that question about Amazon
- Just because drop shipping is an amazing enabler to a business and lowers barriers to entry - it will find its place alongside the global logistics & distribution business models
- Shopify success is not predicated on drop shipping - Shopify’s tail winds include: the internet, ecommerce, globalisation, internet marketing, in bound marketing funnels, social commerce, entrepreneurship, digital payments, business process integration…
- All companies have risks - as one poster mentioned but get the risks into perspective. How about a positive for Shopify with drop shippers - they don’t have any customers accounting for 10/20/50% of their business unlike a lot of other companies. But in any case - their premium fastest growing and most profitable clients are NOT drop shippers, (not that there is anything wrong with drop shipping).
There are possibly risks to worry about to do with Shopify (valuation, competition with Wix/Square, technology disruption, withdraw of Amazon endorsement…) - and I mean to do with Shopify not to do with their customers. If you want to raise red flags can we talk about those?
A
33 Likes
Good post Ant.
err thanks. I wanted to say FFS but thought I’d leave it out. Ugh now I said it.
Anyhow - good to blow of some steam sometimes. Time to go to the gym!
Ant
Very well said Ant!!
Ok my last post was an attempt to clear up drop shipping.
Now I’d like to suggest an analogy or two to clear up the Ponzi scheme concerns of get rich quick promoters of gedinquick drop shipping start ups.
As Business sectors do well there is usually an element of boom bust or maybe bubble like development as over enthusiasm develops and middle men try to benefit.
I’m seeing this all the time - investment seminars, crypto investing groups, coaching and mentoring seminars all trying to do some multi level thing.
Worrying about this either directly or indirectly from a Shopify perspective would be like:
- Direct analogy
6 months ago Five Below took a hit when everyone thought that it was riding a craze in fidgets. Ok sure fidgets were a craze. Maybe Five Below had some exposure and benefit but the point is teens spent pocket money before fidgets and spent pocket money after the fidget craze died down.
People will be buying things on line from websites before drop shipping, during and after any elevated drop shipping usage. People spend money on buying stuff on the Internet full stop.
- Indirect analogy
Actually I prefer an indirect analogy as I don’t see Shopify directly associated with the craze side of the equation. The best analogy I can think of is:
Right now there’s a craze in crypto investing and there’s a constant stream of summits, conventions, conferences, investor clubs and meet ups. Now you might think ok there’s a craze with some Ponzi multi level marketing going on - this is producing elevated levels of usage of conference facilities and hotel venues are exposed to this. When the craze is over demand for conferences will die down and need for venues and faciliies at hotels will be affected.
Hotels do lots of different things and they have their meeting facilities used by lots of different demand operators.
Hotels are not part of the craze they are not only leasing meeting space to crypto meetings but leasing meeting facilities for other purposes and have a core business in room lettings F&B etc and in reality if you are invested in hotels you are better off worrying whether Airbnb is going to eat your lunch not to what degree their business exposure to crypto summit meetings is going to suffer in a downturn when the craze dies down.
Ant
5 Likes
Shopify Plus revenue grew in dollars by 111% yoy. I think they’ll do okay!
Here are the Monthly Recurring Revenue numbers for the company and Shopify Plus.
Qtr. MRR S+MRR Ratio
Mar-16 12.8 1.4 11%
Jun-16 14.4 1.9 13%
Sep-16 16.3 2.4 15%
Dec-16 18.5 3.1 17%
Mar-17 20.7 3.5 17%
Jun-17 23.7 4.3 18%
Sep-17 26.8 5.3 20%
Dec-17 29.9 6.3 21%
Here is the sequential change and how much is attributed to Shopify Plus.
Qtr. MRR S+MRR Ratio
Jun-16 1.6 0.5 29%
Sep-16 1.9 0.6 30%
Dec-16 2.2 0.7 32%
Mar-17 2.2 0.4 16%
Jun-17 3.0 0.8 27%
Sep-17 3.1 1.0 32%
Dec-17 3.1 1.0 32%
The proportion of MRR attributed to Shopify Plus is increasing steadily, currently at about one third MRR revenue. Their focus now is on further increasing this proportion.
DJ
12 Likes
That puts shop+ at only 20% of total rev ie 80% is drop shippers.
1 Like
Ant,
Bravo!
“That puts shop+ at only 20% of total rev ie 80% is drop shippers.”
No, not even close. Drop shipping is a very small and fairly insignificant part of Shopify business. As best I can tell they are mostly involved in drop shipping after the acquisition of drop shipping app Oberlo that occurred in May of 2017.
https://www.oberlo.com/?utm_source=bing&utm_medium=cpc&a…
https://www.shopify.com/dropshipping?jk=shopify%20drop%20shi…
Oberlo is a major source for connecting inventories to drop shippers. There are other apps in the ecosystem but this is by far the largest. They acquired Oberlo For a whopping $15M.
https://www.crunchbase.com/acquisition/shopify-acquires-ober…
If they produce 80% of the $700M in revenue from drop shipping I would think that the app making that happen would fetch a whole heck of a lot more than $15M.
3 Likes
Let me offer yet another perspective. I have been in the ecommerce game for 16 years, and for a good portion of those years, the main business was with dropshipping. There is nothing wrong with that model. It’s not a quick get-rich scheme. There is a lot of work involved.
That aside, the obvious trend is more new sellers come online non-stop, which bebefits Shopify. Majority of new sellers will vanish, but the strong survives. That’s just the nature of the game. It will be a long while before the number of online sellers stops growing. I have no idea when that will happen, I only know ecommerce competition gets more fierce each year (more and more sellers).
My main concern with Shopify was Amazon taking more and more of the entire ecommerce pie, eventually crowding out individual website sellers. However, upon a bit more research, there is no evidence of that happening, yet. The Gross Merchandise Value sold grew an amazing 60~70% in the latest quarter, if I remember correctly. That’s faster than Amazon’s growth. I feel as long as GMV is growing at a healthy pace, Shopify is in good shape and. They benefit from the ecommerce trend that still has a long long run way, and it now appears they have no close competitor as they grow in scale and in the network effect of their platform 3rd party apps.
Shopify is 9% of my portfolio, one my highest holdings alongside ANET and NFLX.
13 Likes
That puts shop+ at only 20% of total rev ie 80% is drop shippers.
Just because is it not a ShopifyPlus doesn’t make it a drop shipper. Is that what you assumed?
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nobody will say that SHOP is a cheap stock but I don’t think the market is so much overvaluing it in terms of its business to dropshippers. Is it? dropshipping can be a scam but not all dropshippers are scammers. The scammers will drop out.
what is the percentage of revenue Shopify derive from dropshippers?
The business prospects should be and will be valued based on sustainable small and medium size businesses. Isn’t this the market? isn’t that a big market?
Can you remind me of the numbers?
tj