Shopify – A timely review.

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Shopify – A timely review.

I know you’ve heard a lot about Shopify lately, but I was troubled to see several members of the board get scared out of their positions by a hysterical short attack and I thought a little review of Shopify, the actual company, might be in order. Let’s take a look.

Their success in the marketplace: There has probably been no other company on the planet that has been more successful at growing, that has grown as fast and as consistently as Shopify has over the past four years. Here’s what their revenue has looked like, if you’ve forgotten:


**2012      24 million**
**2013      50 million**
**2014     105 million**
**2015     205 million**
**2016     390 million**

That’s slightly over 100% compounded for four years, a little over a 16 bagger for revenue in four years. At the end of this year it will be roughly a 28 bagger in 5 years. I don’t remember seeing any company, EVER, that has grown like that.

What is their marketplace? Is it growing? Well they are in online commerce. They help merchants set up and run online websites and businesses. Is online commerce a contracting market or a growing market? Do you see it contracting any time in the forseeable future, with a rush back to bricks and mortar?

But they just fell 15.9% in a week! Surely that means the end is near:
What short memories! Shopify hit $105.50 in the beginning of August and fell 16.4% to $88.20 in a week and a half. Was it the end? Well in the next month it rose to $123.80, a little over 40%!

That doesn’t mean they’ll rise 40% in the next month from now. What it means is that stocks like this are volatile.

What’s their business model? How do they make money?
They have two main revenue streams, Subscription Solutions and Merchant Solutions.
Subscriptions Solutions is SaaS revenue. It’s recurring each month, and just grows. It’s high margin.
Merchant Solutions is the money they make from their merchants’ sales. It’s also recurring in a sense, as their merchants keep making sales. It’s much lower margin.

Shopify Plus is their solution for major enterprises, of whom they have surprisingly signed up quite a few, certainly many more than I expected, and it’s growing very rapidly. To give you an idea, some that launched just in the June quarter included Visa, Frito-Lay, BuzzFeed, Canadian Tire and The New York Times, (and others that I’m not bothering listing).

Shopify Capital gives loans to their customers which is paid back out of the sales the merchants have on their websites.

Why aren’t they making any profit?
Well, they’ve said that their market opportunity is so vast that they’d be crazy not to grab as much of it as they can. So they have been conscientiously pouring about 1% to 3% more into building out the business than they’ve been taking in as revenue. They lost all of 1 cent per share last quarter and have promised for some time that they’d have a profit in this Dec quarter. (They can have a profit whenever they want it by spending 2% less, and it may arrive a quarter early).

How have they been doing recently? Let’s look at the June quarter:

Total Revenue was up 75% to $152 million. In the ordinary world companies don’t grow revenues by 75%. They just don’t! This is extraordinary.

Subscription Revenue was up 64%. It was 47% of revenue, and is almost all recurring. Shopify Plus, the large merchants, was up 89% and was 18% of recurring revenue, and growing rapidly.

While we’ve heard from posters on the board that it’s hard to sell online, Merchant Solutions revenue was up 86%, and is growing faster than subscription revenue. Gross Merchandise Volume passing through their system was up 74% to $5.8 billion. Yes, Billion!

Gross Profit was up 83%. That’s faster than revenue, and thus means increasing gross margins.

Now look over some of those percentages of growth that we just encountered: 75%, 64%, 89%, 86%, 74%, 83%. Is this company having any trouble growing? Is it reaching the end of it’s TAM? You must be kidding!

Here are some business highlights they announced:
• In July, we began shipping our Chip and Swipe Reader, enhancing our point-of-sale channel, which is our second-largest channel for GMV.
• Also in July, we announced the integration of eBay as a channel for merchants. The integration will enable Shopify merchants to surface their brand and products to more than 169 million active eBay buyers, while managing eBay orders, inventory and messages from within Shopify.
• In June, we announced the integration of Buzzfeed, with its audience of more than 200 million, as a channel for merchants.
• Shopify Pay, a feature designed to increase conversion at checkout by streamlining the checkout process, especially on mobile devices, went live in Canada.
• Shopify Payments went live in New Zealand, added to the US, Canada, U.K, Australia, and Ireland.
• We made the virtual assistant Kit free to all merchants, to use to help automate online marketing.
• Mobile traffic to merchants’ stores continued to grow, reaching 72% of traffic and 60% of orders.
• In the quarter, Shopify Capital issued $37 million in merchant cash advances, up nearly 100% sequentially!

How about competition from Amazon, eBay, etc?
Well a couple of years ago Amazon closed their own merchant website service and told people to use Shopify. And Shopify will now also be native on eBay. Here’s what they said in the conference call:

In both those cases, our objective here is to ensure that our merchants on our platform can sell anywhere they potentially have customers waiting for them. And so, obviously, Amazon and eBay being two of the largest marketplaces globally were obvious fits for us.

Amazon, we’re continuing to work with to improve the experience for our merchants. We also are beginning to expand into new categories with Amazon, which is exciting. eBay hasn’t launched yet, but again, the goal, whether it’s Amazon or eBay or it’s BuzzFeed or Wish or any of the other channels that we’re looking into, is to enable our merchants to sell more.

The addressable market continues to get larger and larger. And Shopify is actually increasing the size of the pie.

Conclusion: Okay, here’s this company that is growing at a rate beyond which we’ve ever seen, and has signed up enterprises like Visa, The New York Times, Nestles, Frito-Lay, etc, and you are going to get scared out of your position because some short tells you it’s like Herbal Life? Does this sound like Herbal Life to you? Really? Read it again!

Best to you all

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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Thanks for this, Saul.

On the day the short article came out, I posted that I’d wait a few days before deciding whether to sell some of my shares, buy more shares, or do nothing. A few days later, I bought shares at about $101 per share. That brought my average purchase price to about $45 per share. I always make my own decisions about whether to buy, sell, or whatever, but Saul, your “voice of reason” posts are always spot on, and greatly appreciated.

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Thanks Speedy for your kind words.
Saul

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Great post/reasoning, Saul, you have a knack for making it all sound pretty simple.

I added at $102 and again at $97, and if it drops below $90 I’ll add again. Didn’t need your confirmation to do it, but always nice to know I came to the same conclusion you did about this attack.

As I stated in an earlier post, I don’t have as large an allocation in SHOP as many here, but I’ve now been able to increase it to where I want it.

They just need to keep doing what they do!

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Having followed Saul’s discussion boards for the last 2 1/2 years or so, and been an avid TMF follower for many more, has been a great learning opportunity to prepare myself for if I will react or respond when something like the SHOP short happens to one of my largest position/strongest conviction companies in my portfolio. Over the last couple of years, I have asked myself this question over and over and feel very prepared for the opportunity for me to respond to the SHOP short. It’s very true that we all have to develop our own convictions and make our own decisions ahead of events like this happening, so we drill our well before we’re thirsty. That’s my long-winded way of saying that my honest first reaction to the Citron report was that I was ticked at Mr. Leff, but that I remembered preparing myself for something like this happening to any of my holdings. I believe he truly has provided us longs with a buying opportunity. It was that mindset that I have many of you to thank (especially Saul) for helping me to develop, internalize and believe for myself. As my largest position prior to the short, I have not sold and do not plan to sell any of my SHOP. In fact, I’m waiting to purchase additional shares in the very near future. Thank you to Saul and others on this board for your help in this regard. None of us have all the answers on our own. By collaborating and sharing perspectives, we can come up with actionable perspective and positions from which each of us as individuals can move forward.

sjo

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I believe he truly has provided us longs with a buying opportunity.

https://www.barchart.com/stocks/quotes/SHOP/interactive-char…

You do realize that you had this same opportunity a little over a month ago and for the previous several months before that?

In fact, I’m waiting to purchase additional shares in the very near future

Why are you waiting to purchase when you just said above that this was a buying opportunity?

Saul has presented the bull case for SHOP that everyone is already quite familiar with. What he didn’t remind everyone of is whether at this moment in time, SHOP is undervalued, overvalued or fairly valued.

IMO, the most valuable information that Saul reminded everyone here about was this one sentence:

That doesn’t mean they’ll rise 40% in the next month from now. What it means is that stocks like this are volatile.

Recall that the company in Q1 enacted a new reporting policy here:

In the Q1 earnings call, the Shopify team announced that they would no longer be giving quarterly updates on the number of merchants the platform has. Normally, this may give reason to be concerned, but I personally believe they are withholding this number to keep market expectations in check.

Even SHOP is well aware of the volatilty of its shares and the high P/S and that Chris would slap them around for messing up his extremely solid spreadsheets that track these numbers :wink:

Bottom line, the short article seems like the wrong focus these past couple days IMO…much better would be whether at this time with this stock at this valuation?..is this the best place against all the other alternatives available to you.

There is much to like about SHOP…its been amazing to a great many investors and likely will yet to come.

Best:
Duma

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IMO, the most valuable information that Saul reminded everyone here about was this one sentence:

That doesn’t mean they’ll rise 40% in the next month from now. What it means is that stocks like this are volatile.

Sorry, but really? THAT is the most valuable point? How about the analysis of the actual company – their business model, their competition, how they make money, how much they’re growing, and why they are likely to continue to succeed?

You see, in the short term the stock market is a voting machine, and we don’t have much control over how the masses want to vote. But in the long term it is a weighing machine, and companies are actually worth $$ because of their performance.

It is incredibly short sighted to worry about what the company will do in the next few months. If the stock goes up a lot in a few months, it will go up less later. If it holds or goes down in the next few months, it has more opportunity later.

But if you own it now, you don’t have to care when it goes up.

Bear

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Written 18 years ago…2nd post in the thread says it all.

http://discussion.fool.com/bulls-at-what-cap-is-amzn-overvalued-…

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Nice branmin… One day someone will refer back to this or one of the many other Shopify threads for the same reason… the short term thinking out there baffles me sometimes… You’d think this company went from 75% rev growth to 40% in a quarter the way people have reacted… same company it was two weeks ago at $123.

MC
Long SHOP

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What s wrong w herbal life?

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a few more - just curious

*how much is SHOP being valued by the market? Using 105m shares (including those share equivalents excluded due to reporting negative EPS), at $98 the valuation is about 10.3b. However, SHOP has 932m in cash (wow!), so say the valuation is about 9.4b. (fwiw, The company issued 825k in options in the first six months, and also floated a secondary to increase cash).

*What ratios can we use to value SHOP? On a P/S basis, that works out 9400/532 or 17.7x. However, this is a trailing number (sales are growing fast!). There are no GAAP earnings due to a near doubling of marketing expenses; 75% increase in yoy marketing has been matched by a 75% in sales.
Slapping a 10% net margin on trailing sales gets you to 53m or 177x PE. Slap a 20% net margin and you get 89x. Double sales and slap on a 20% net margin and you get 1064 in sales, 213m in profits, or a PE ratio of 44x. Triple sales with a 20% margin and you get 319m in profits or a more reasonable 30x earnings which is a pretty good price for a company that grows sales - and margins hopefully - this quickly. Course, SHOP issues options, enjoys deferred revenue, and ala Amazon has ways of making cash flow exceed reported earnings, but you get dilution too - which is magnified with every rise in the stock price. I’m just looking at simple numbers.

short or long? no idea
pretty BS - you bet! FANTASTIC BS

curious - how fast will it take to triple revenues and get net margins to 20%?

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I was just curious what SHOP looked like at $123
so 105 x 123 = 12.9b; probably higher given dilution but we’ll subtract cash and round it to 12b

If SHOP makes revenue go up 4x
and achieves a 20% net margin
then 2128 in revenue and 426m
12000/426 or 28x

ok, if you held at 123, you probably figured you could make 20%
so 123 x 1.2 or $148 x 105 or 15.54 or roughly 14.5 after

If SHOp makes revenue go up 5x
and achieves a 20% net margin
then 2660 sales and 532 in profits
or a PE ratio of 27x

if right (maybe somebody will check my math…) if you held it for a 20% gain at 123
you expect revenue to go up 5x
achieve a 20% net margin
and trade for a PE of 27x
and you will break even…

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if right (maybe somebody will check my math…) if you held it for a 20% gain at 123
you expect revenue to go up 5x
achieve a 20% net margin
and trade for a PE of 27x
and you will break even…

sorry, too late at night
you have to hold that PE I meant to make 20%
I guess I’m thinking about PCLN in Jan 2016
which traded for 14x or so estimates
despite years and years of GAAP earnings growth
and CFFO nearly 30x CapEx or so
course, PCLN is worth double that now

thanks for the discussion on SHOP
that Balance Sheet is amazing…

be well…

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Thanks for that Saul. Well done.

Shop is still my 3rd largest position after Tesla , LGIH.

Added to shop @ $ 103

Frank

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CRM, another well known SaaS company, has negative earnings the last 5 years and has been growing revenue at between 25 & 30% each year.

http://financials.morningstar.com/ratios/r.html?t=CRM&re…

Yahoo has CRM P/S of 7.37.

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branmin

Written 18 years ago…2nd post in the thread says it all.

http://discussion.fool.com/bulls-at-what-cap-is-amzn-overvalued-…

In 1999 Amazon’s p/s was just under 15 and the share price went to $106.

If you bought at that price you would have seen the share price decline to single figures and you would have to hold for a full 10 years before breaking even.

Since 2001 and up until recently, Amazon’s P/S has always been below 3 with a median of 2.2 (recently moved up to 3.4).

If SHOP was to follow Amazon’s pattern, we would have to wait 10 years to break even - before then going on to make a killing.

I’m not seriously comparing SHOP to AMZN - SHOP is capable of generating much higher margins so should trade at a higher p/s.

But if you are going to look at AMZN in 1999 in order to justify investing in SHOP at a high p/s now, than it is worth remembering the context of the 10 years it took for 1999 investors to break even.

SHOP may well be a very profitable investment. But there is no such thing as a ‘sure thing’ and you should allocate accordingly.

Ian

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Buying AMZN in 1999 was not a good idea:

http://invest.kleinnet.com/bmw1/stats20/AMZN.html

OUCH!!!

but… who would have dared to buy it in 2002?

AHHH!

Denny Schlesinger

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Sorry, but really? THAT is the most valuable point? How about the analysis of the actual company – their business model, their competition, how they make money, how much they’re growing, and why they are likely to continue to succeed?

Hey Bear:

Please allow me to clarify. I am suggesting (as are now a few others including Bert I might add), that there should be a clear delineation between assessing a companies business fundamentals (essentially what Saul posted) against that company’s stock valuation.

Regarding the former, it appears to me that even Saul called it a “review”…implying there is little new information and that information is already known to the market…all of it.

My point is that there seems to be a pre-occupation with the short article that is wasted energy…everything that Saul summarized essentially argues against Left’s counterpoints…and the market already knows this also.

But what is sorely missing here when discussing business fundamentals is that many times (may be most times), there is a disconnect between the accumulation of a stock against the adoption of that same company’s technology.

I created a “rule” about it in 2004 here:

http://discussion.fool.com/the-duma-rule-20598973.aspx?sort=whol…

The background from this was that we had all lived through the Y2K crash and many/most were licking wounds of stocks being driven to excessive valuations (MSFT and CSCO P/S above 35) and then when expectations faltered…massive deleveraging ensued with losses of 70% or more in many of the technology stalwarts.

The “rule” assumes that you are mostly correct about the technology (take SHOP’s fundamentals for example) but that most often stock accumulation disconnects with fundamentals. There are simply myriad of examples of this phenomenon that can be successfully traded (each phase having variable risk assigned to it as suggested in that rule post) over the prior 20 years from VRTX, ISRG, CREE, OLED, MBLY, INTC, AAPL, CSCO, and on and on.

SHOP is no different at a P/S of 23 or even 17 IMO.

Now we do see people trying to bring up the exceptions to the rule…like FB that has had a steady P/S around 13-15 for some time…or the recent example of AMZN…that if one held for 18 years, would have returned nicely (but not before 10 years, just trying to get whole). IMO, when I see posters cart out what they believe to be comparisons to justify the valuation (like comparing AMZN and SHOP), I think there is great risk of confirmation bias.

SHOP is a standalone business. In the case of AMZN, I would argue, by virtue of their numerous businesses (not the least of which is the AWS cloud), SHOP can NEVER be another AMZN…not going to happen IMO. AMZN really struggled as a pure online marketplace as you may recall in the earlier years. So if the argument then is that SHOP is a FB…I have already pointed out that FB is an anomaly.

So really my point was that the Left article is a side show…the bigger issue is the P/S (then at 23) because the volatility could just as well have occurred because their year-end total merchant number (which they no longer report quarterly) wasn’t to expectations or the revenue growth rate “slowed” to 50%. The expectations are near stratospheric for SHOP and ANY little permutation (Left or otherwise)…will see major moves at this level of valuation.

Please understand that this is NOT commentary on SHOP the company but rather the SALC/TALC disconnect and risk premium being paid by shareholders at these levels. SHOP was good to me also…4 multiple in about a year…I am not a SHOP basher…I do however have “rules”…and I struggle every day to follow them…just like Bert and several others on this board have intimated.

Peace:
Duma

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Duma, your clarification helps. I really didn’t know that’s what you were trying to say. But I still disagree, and here’s why.

The background from this was that we had all lived through the Y2K crash and many/most were licking wounds of stocks being driven to excessive valuations (MSFT and CSCO P/S above 35)…

The “rule” assumes that you are mostly correct about the technology (take SHOP’s fundamentals for example) but that most often stock accumulation disconnects with fundamentals. …VRTX, ISRG, CREE, OLED, MBLY, INTC, AAPL, CSCO, and on and on.

SHOP is no different at a P/S of 23 or even 17 IMO.

SHOP is different. And I don’t have to compare it to AMZN or FB – Shopify can stand on its own merits. It’s different because as Saul said, nothing has ever grown revenue this fast – and maintained it for several years.

However, as you said:

my point was that the Left article is a side show…the bigger issue is the P/S (then at 23) because the volatility could just as well have occurred because their year-end total merchant number (which they no longer report quarterly) wasn’t to expectations or the revenue growth rate “slowed” to 50%.

Thanks again for the clarifying post. These points are well taken, and I would simply edit and summarize as follows:

  1. Although an exception because of their incredible growth, Shopify must maintain the growth!
  2. Even with fantastic growth, they’re also trading at a high multiple, which brings with it volatility.

I agree with these. I even practice a little prudence as the valuation fluctuates. To put a finer point on it:

I accumulated an enormous (25%) Shopify position last December when the PS ratio was around 11. I didn’t hold nearly as much at a PS of 23, even though the shares where up from $40 to $120. I sold some…I diversified. But at a PS of 18, 17, 16…I’m starting to get greedier with Shopify again. We’re not in bargain territory, but considering after earnings in a month the PS ratio will drop even more, I think we’re getting close. It could happen…but why would we expect to see this company trading at a bargain price? As you said, Citron’s bluster is a side show…which will abate.

Let’s also remember that even though the PS is up 50%, 60%, or whatever, the shares are actually up 128% YTD. That’s the power of the speed at which revenue is growing.

Bear

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I’m not sure how comparing Amazon and Shopify makes any sense.

Amazon’s basic retail business is very capital-intensive (requiring more and more huge capital expenses all the time: distribution centers, delivery trucks, cargo airplanes, etc etc. Being a retail business that prides itself on low prices and free delivery, it has very low gross margins. Very low gross margins means that net margins have to be even lower.

Net margins for Amazon’s combined domestic and international business was just about zero for the trailing twelve months (actually slightly negative), while their mature domestic retail business, when considered alone, has a TTM net margin of 2-3%. The AWS business is more profitable but also requires a lot of capital expenditure. See the last quarter report here:

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol…

Shopify, on the other hand, is a software business, which requires very low capital expenditure (no distribution centers, delivery trucks, cargo airplanes, that kind of thing). It’s not at all capital intensive. It has a high 57% gross margin. When mature it can have net margins that are…what? Perhaps 10 times the margins of Amazon’s? I don’t know.

What does this mean?

By definition, lower margins mean that Amazon needs huge amounts of revenue to make smaller amounts of profit. Since the Profit to Sales ratio is lower, that justifies only a lower Price to Sales ratio.

By definition, higher margins mean that Shopify needs smaller amounts of revenue to make larger amounts of profit. Since the Profit to Sales ratio is higher, that obviously justifies a higher Price to Sales ratio.

Okay! Now some posters are saying that Shopify is a great company, but the stock price overshot its mark at $123. That may be true, but some of them were probably saying the same thing at $30, and $40, and $50 and $60! What I try to do is pick good companies, and I don’t try to trade in and out, trying to guess short term highs and lows.

I expect that Shopify will stay somewhat over-valued, and that three years from now, when Shopify’s revenue is four times what it is now, the stock price may be three times the current price. Just an off-hand guess.

Best,

Saul

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