Shopify – A timely review.

<<<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.>>>

As Duma points out, SHOP is not AMZN. Two big ways, one is AWS (SHOP has no such thing and never will), and AMZN sold its own products for a long time. It was not until a few years ago that AMZN’s third party sellers became half of their merchant value.

But the most relevant point, AMZN makes more profit off of AWS today (even as it is still growing rapidly) than Amazon makes off the more than $100 billion in retail sales that it makes from its own products and from third party products that it provides fulfillment and other services for.

Point being, that without AWS, Amazon may still not have recovered and the 10 years it took to recover might still be running.

The comparison is just wrong. Buy or not buy SHOP for SHOP. Don’t buy it as an analog, and don’t buy it because it makes you feel like you belong to a club. SHOP’s past results speak for itself. SHOP’s current merchant make-up is being debated as it is clear a good chunk of its new merchants are the drop shippers and to the 40 million or so existing small and medium size businesses as is the narrative. I do not know if that makes any difference or not. SHOP’s future is not knowable, but it clearly is the best online merchant platform in the world today.

But just don’t buy it with visions of Amazon. It clearly is more like eBay, but even there it is not eBay either. It is SHOP.

Tinker

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

the valuation could be ok if they continue to grow at a >66%(?) clip Q2Q. But what if that growth is lower? or slowing? what do you think will happen to the stock?

clearly if one believes in Shopify’s future in the next several years then that may not matter what happens in the shorter term but what if you are trying to play the ups and down of this stock?

when you say ‘buying opportunity’ is that considering the next-few-quarters timeframe or the next several years?

if it is the latter, this drop may not matter that much. SHOP can be seen as an opportunity throughout this year when it was at $40 or when it was close to $120. That is of course if you believe the long term expectation and that it did not change when the stock was at $40 and when it was close to $120.

tj

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“…SHOP is not AMZN”

I don’t know if that is true or not. Do you really? 18 years ago no one knew Amazon would have become what it is now and I would argue even Bezos did not know the extent then.

the analysis can only be of the past and one just hopes it extrapolates. But most analysis do not even claim that it can extrapolates to >10years.

yes with Shopify’s short past you cannot see how it can become something in the order of Amazon. But things can happen and we don’t know what they will be.

Debating if SHOP can be like AMZN or not may be fun but it is rather meaningless because there is no way one can know until the time comes.

tj

<<<“…SHOP is not AMZN”

I don’t know if that is true or not. Do you really? 18 years ago no one knew Amazon would have become what it is now and I would argue even Bezos did not know the extent then.>>>

https://en.wikipedia.org/wiki/History_of_Nokia

Here is the history of Nokia. By that same logic one should have bought Nokia in say, 1982 because “no one knows what it might become.”

That is not a good reason to buy a stock. I do admit that great management will manage to make changes. Things are dynamic. But no, SHOP is not AMZN. Not a difficult assertion to make. And I am glad of that. If SHOP were Amazon, Amazon would be eating its lunch like it does every other Amazon wanna be.

Also, if I buy something off of Amazon I trust it. I was just ripped off last week for a $100 purchase. It was bought through Prime from a third party. The product never arrived despite package tracking (that was provided by the vendor). Amazon, without hassles, no more than 30 minutes of time on my part, refunded my money.

What happens to a SHOP website vendor who is not selling through Prime? I am out $100 and s crewed, to accurate and succinctly put it.

There are real differences. So SHOP has to find its own way, as SHOP as it will never be Amazon.

Tinker

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Think you have not quite taken this in the context intended. Was never comparing the two. That would be meaningless, plus I was simply quoting a post from 18 years ago by someone else who obviously had vision and understanding for the product they were investing in and like Saul and others here have obviously broken Shop down to the Nth degree and unless something changes, see a lucrative future.

How this poster had the vision to predict that Amazon would be a 500 billion Company 18 years(valued then at 2.5 Billion) ago is beyond me. Luck, intuition, possibly? Or a true and comprehensive evaluation of a Company that had such incredible future potential, I don’t know, but just reminding you what this poster said and stuck with it and possibly made a fortune in the process, a la a certain Mr. Buffett in his business principles.

"As a Foolish investor, I buy and hold and hold and hold, and only sell if a change in the company’s business fundamentals dictate I should.

Finally, I see an incredibly bright future, a very profitable future, for this company for many years to come. I think the surprises will all be on the upside, and that all but the most optimistic internet prognosticators truly understand how transformative this industry will be. I want to own – yes, at any price, with a decades long holding period – the one company I think is best positioned to profit from it. I believe the company WILL one day achieve higher revenues and profits than Wal-mart. I want to be along for the ride – the whole ride, not just the parts of it in which I consider the stock to be fairly valued. This is how investors make the big money.

If I didn’t already own so much, I’d buy more shares during this sell-off. Great long-term patient LTBH’ers investment that will bring rewards.

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I would make the point in this discussion about SHOP that it is helpful, comforting and almost certainly more profitable to identify what kind of investor you are. I am not an investor on the Saul model. I would be no good at it at all.

I normally only own higher-growth companies which also show a history (that’s the important bit) of ROIC, cash generation, low debt and so on, which I find by screening and very demanding DD. These are ‘investments’. I know exactly how I like to find them and value them. I really try to compound these holdings. They tend to get the benefit of the doubt.

But (not being made of stone) I occasionally have up to 3 or 4 bets, and not always a small ones - each might even be as much as a book cost of 3% of my pf, on a ‘speculation’ (everything else is categorized in that way). I am happy to be cynical about them. It does not especially trouble me not to own them. They rarely get the benefit of the doubt. I take a profit just whenever I feel like it. Thus, on a $20 tomato like SHOP, I am happy to ride the momentum but when it slips through the desk-top trailing stop-loss figure, it’s ‘goodnight, maybe see’ya later, hope-so!’.

And I do hope so. What an outstanding company Shopify is. Give me a price I can live with. I like it in the ring but I want better odds.

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"Here is the history of Nokia. By that same logic one should have bought Nokia in say, 1982 because “no one knows what it might become.”

That is not a good reason to buy a stock. "

I agree and that is not why anyone would own SHOP! It is not completely a shot in the dark like it is often the case when one is stock picking.

You are talking about today. Yes SHOP is not AMZN. That is clear. Can SHOP have the success AMZN has had? that was the question to which I anwered why not?

tj

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Nokia is located in Finland listed on NYSE. Problems I fear is 1st is what implications President Trumps tariffs or tax penalty that could come to fruition and could be negative to investing in Nokia in the future. (I know symbol: STM I sold recently were taxed by Genva, Switzerland. So I have really tried to be careful of investing outside of our U.S. borders) even though it’s through NYSE. 2nd is Nokia low price web- http://www.nokia.com Nokia Corpation SYM.(NOK) Updated NYSE October 6, 2017 04:02 PM ET $5.91 -0.02(-34%) has over buy all over it. Option players play stunt growth.

Well you can’t compare Shopify to Amazon but investing promoters always try too… And any body who reads press on Sopify they bring Amazon as part of the comparison . True analysts or not?

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.

Thanks Saul:

OK so by my back of napkin math, you are saying that the final P/S in 3 years will be around 11 and that the compound annual revenue growth will average around 60% until then.

Is that correct?

That would certainly be phenomenal revenue growth from around $648 million in 2017 to $2.7 Billion in 2020 and with a then market cap of $29 Billion.

If so, what other examples can you suggest where a stock has maintained a P/S above 11 for 6 straight years other than FB? There may be others so how common would this be in your experience?

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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.

Thanks Saul: OK so by my back of napkin math, you are saying that the final P/S in 3 years will be around 11 and that the compound annual revenue growth will average around 60% until then. Is that correct? That would certainly be phenomenal revenue growth from around $648 million in 2017 to $2.7 Billion in 2020 and with a then market cap of $29 Billion. If so, what other examples can you suggest where a stock has maintained a P/S above 11 for 6 straight years other than FB? There may be others so how common would this be in your experience?

Let’s start with this question: what other examples can you suggest where a stock has maintained a P/S above 11 for 6 straight years.

Duma, that’s the whole thing with Shopify: How many companies do you know that compounded 100% revenue growth for four straight years? The answer is None! Shopify is a phenomenon. Why would it not have a P/S over 11, for gosh sake?

And then let’s go on to this question: you are saying that… the compound annual revenue growth will average around 60% until then. Is that correct? That would certainly be phenomenal revenue growth…

Is it really so phenomenal for a company that has compounded 100% for the most recent four years, to compound just 60% for the next three? Not really, I would think!

Where did I get that four times revenue in three years? I assumed 75% growth this year, 2017, 60% growth in 2018, and 50% growth in 2019. I get 420% of 2016 revenue at the end of 2019. That’s quadrupling and a little more. You can tinker with that calculation as you wish. I’m not insisting on any of the numbers, I said that it was an off hand guess, but it’s probably not too far off.

As far as Shopify staying overvalued, my guess is that of course it will stay overvalued until it slows down enough to resemble a normal hyper-growth stock, and maybe even long past that. But that’s just my naive take.

Best,

Saul

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Duma, that’s the whole thing with Shopify: How many companies do you know that compounded 100% revenue growth for four straight years? The answer is None! Shopify is a phenomenon. Why would it not have a P/S over 11, for gosh sake?

Saul:

While I agree that the 100% compounded growth is great, it was from a startup ($0)and not from a company around a few years. But you would be hard pressed to find companies that could sustain that compound revenue growth beyond a few years…even SHOP is down this year to what 70-75% YoY?

So you seem to feel SHOP is in a category all its own for which there really are no historical comparisons…or at least that easily come to mind (neither the three that Left mentioned) or any others off hand…again other than FB that I already mentioned.

So this will be unique to SHOP (and perhaps FB) alone that it could continue that incredible growth rate AND maintain a P/S over 11 for 6 years without being derailed by issues such as economic downturn, etc.

It is possible.

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While I agree that the 100% compounded growth is great, it was from a startup ($0) and not from a company around a few years.

Duma, That’s not true at all! It’s incorrect in every respect. The company was founded in 2004. That 4 year stretch of 100% growth started in 2012, when it had been around for a lot more than a few years, for eight years, in fact. It didn’t start from $0, but from a company that was already bringing in $24 million per year. The sequence went like this:


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

Duma, take a look at that! You may not feel it is for you, but it really is a unique phenomenon. I know of no other company, EVER, that has grown like that (although I’m sure there must have been). Do you know of any? It’s a tad over 100% per year, compounded, for four years. Granted, they are starting to run into The Law of Large Numbers, and this year they are growing revenue at a “slow” 75% growth rate for the first two quarters. But still…

Saul

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<<<2012 24 million
2013 50 million
2014 105 million
2015 205 million
2016 390 million>>>

I have seen such businesses, in fact they are not that uncommon as start ups:

This is Twilio, growing more than 100% for 4 years prior to going public: http://www.marketwatch.com/story/five-things-to-know-about-t…

<<<The company posted sales of $49.9 million in 2013, followed by $88.8 million in 2014 and $166.9 million in 2015>>> Okay only 3 years and barely under 100% but I would assume that 2012 to 2013 was equal or better in revenue growth for 4 years.

I am sure Nutanix did, but growth has slowed down to about 85% when it went public on revenues of $444 million, thus growing faster than SHOP at a higher revenue level:

https://seekingalpha.com/article/4009443-nutanix-investors-a…

I have 3 years on the Trade Desk, but I am certain it works out to 4 if you took 2014, although not quite up to Nutanix or Twilio or SHOP but quite close:

https://amigobulls.com/stocks/TTD/income-statement/annual

In the internet period there were tens and tens of companies growing that fast over sustained periods of time. The problem in the end, except for the very best ones, the revenues lead nowhere near to sustainable cash flow. Every single one of those companies hit a revenue growth wall. Every one despite their historical growth record.

This is just from a five minute analysis. What SHOP is doing is superb in regard to revenue growth, but not unprecedented. And the issue some of us have is if the revenue growth is being “goosed” by unsustainable businesses selling business opportunities in drop shifting (YES, THEY EXIST, THEY ARE LEGITIMATE BUSINESSES, BUT IN THE END, HOW MANY DROP SHIPPERS CAN THE MARKET SUPPORT? CHEAP TO ENTER THE MARKET, LOW SKILL TO MAINTAIN IT, LITTLE TO NO PRODUCT OR BRAND OR TECHNOLOGY DIFFERENTIATION, IT COMES DOWN TO PURE SUPPLY AND DEMAND).

This said, in a sufficiently diversified portfolio, who cares. Just might pet peeve on SHOP at the moment. SHOP might out grow it, SHOP might change strategy, but IMHO SHOP (not anymore than eBay) can make a long term sustainable business if the numbers are being goosed by low quality merchants instead of long-term merchants who are creating differentiated businesses with long-term viability.

This said, as I said before on NPI, this is not a problem for the short to some medium term, but at some point the boom terms to bust if the merchant growth is materially unsustainable merchants being recruited by 10s of thousands of partners. How many such businesses can make money in the market? The market for drop shipping is not infinite, nor is it geometric. The more drop shippers, the harder it is to make the easy money.

That is my opinion. I would like SHOP to give us more granularity in their merchant make up.

No right or wrong here, just a good discussion. Neither of us have any insider information. We are reliant on what SHOP tells us and we can ascertain from all the clues.

Thanks Saul.

Tinker

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In the internet period there were tens and tens of companies growing that fast over sustained periods of time.

It was common enough that there was a book written about it

Inside the Tornado: Strategies for Developing, Leveraging, and Surviving Hypergrowth Markets – December 14, 2004, by Geoffrey A. Moore

https://www.amazon.com/Inside-Tornado-Strategies-Developing-…

and a picture…

https://celikalper.files.wordpress.com/2008/01/talc.jpg

Denny Schlesinger

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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-…

Yes, even with one of the greatest firms with the best CEO in the world you can lose 90% of your investment in 15 months.

That is a great message to take to heart. Seriously.

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First time poster but this discussion has sparked me to add to the discussion regarding Shopify’s merchant make up.

To put some perspective into this what does everyone think about in terms of EBay’s make up or Paypal’s make up? My personal standing is that if you create a great platform available to all then its bound to attract all kinds of customers. I’m sure that Ebay and Paypal may have businesses using their platforms that they would prefer not be the focal point.

Ronald

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Duma, that’s the whole thing with Shopify: How many companies do you know that compounded 100% revenue growth for four straight years? The answer is None! Shopify is a phenomenon. Why would it not have a P/S over 11, for gosh sake?

The only problem with this is sales aren’t profits, and Amazon is the 1 in 1,000 exception rather than the rule, especially given AMZN’s cash flow dynamics. I agree, if we continue with no market correction for another 9 years and SHOP continues to do well on the top line then the valuation can remain sky-high, but I can think of a LOT of business models that can generate huge sales increases if they aren’t requiring profits to go with it hand-in-hand. And if sales really can continue to grow by 50% for many, many years then buyers of today will be very satisfied (it would be hard to fathom that margins won’t naturally scale to high levels). That said…maybe, possibly, perhaps - eventually SHOP must transition from GAAP losses to GAAP earnings, and they need to pivot in a hard way (being barely profitable would almost be dangerous - why be barely profitable and puncture dreams when you can remain unprofitable and investors can build castles in the sand). In the meantime, even the hint of a slowdown would savage the stock price. Course, you know this 100%. Everyone on this board knows this.

No predictions here, just unease. But to each his own…

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Castles in the air. Not the sand. But it may be a castle built upon sand if romantic ideas (building castles in the air) is translated into action (building a house upon sand) which, as we know, cannot stand.

Very important these things.

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Saul your napkin is right. But the thing is that if you added the 3rd party sellers money you could be right. Whole thing that started this was how so many people got rich using the whole Sopify forum of setting people or small bussiness in bussiness . Take eBay and 3rd party revenue added together. Same thing but eBay is more well known because of the length of exposure to main stream U.S. & Canada. The whole deal is most investors follow 2nd party advice comparing Shoify to Amazon where in fact there isn’t any at all except one. And that’s the use of 3rd party sellers who a lot of times fly under Amazon/ eBay store/ (3rd)sellers. Which I don’t buy from I once bought from a 3rd party on Amazon and it was a ripoff because shipping back the item cost more than item. That’s the way I see it. Not true?