Shopify (SHOP) – My Quarter-End Review
Who is Shopify?
Shopify provides a cloud-based and multi-channel eCommerce platform for small and medium-sized businesses to sell their products. Its platform provides merchants with a single view of their business and customers in various sales channels, including Web and mobile storefronts, social media storefronts, mobile apps, and physical retail locations; and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting. It was founded in 2004, had its IPO in May, 2015, and is headquartered in Ottawa, Canada. It reports in US dollars however, and trades on the NYSE, so there is no problem with foreign currency, etc. Its market cap is over $2.2 billion, so this is not a microcap in spite of its recent IPO. Its average volume is about 700,000 shares/day. Its IPO was at $17, and it started trading at $28. It’s been as high as $42 and as low as $18.50, and is currently right about where it started trading in May, about $28, plus or minus.
What is your history with them?
I’ve been a stockholder for roughly two weeks now. They are one of my tiny, try-out, positions.
You must be kidding. This company has no earnings. It breaks all your rules!
Well, you are right about having no earnings. It lost 13 cents in 2015, and a penny in the last quarter, and that’s why it’s a tiny position at present, but you are wrong about the other rules. It fits a lot of the other things I look for in a company. For example:
Revenue growth - This is in millions of dollars, rounded off. (Hold on to your hats!):
2012 - 24
2013 - 50
2014 - 105
2015 - 205
Thus, revenue has doubled every year, compounded.
Moat – It controls its space of providing a platform for small and middle size businesses who want to sell over the Internet. It has the best, most flexible, and most complete platform, and has such a dominant position that, in 2015, even Amazon closed its own platform for these businesses and decided to just use Shopify’s. Clients can use a Shopify platform to sell anywhere they want to, on their own website, on Amazon, or with a buy button on Facebook, etc., or all of the above simultaneously.
Recurring Revenue – It’s pretty much ALL recurring. Their monthly subscription revenue is at a current pace of over $130 million, well more than 50% of 2015’s revenue, and growing rapidly. The other part of their revenue is the cut they take on each transaction, and on shipping if necessary. That’s growing even faster.
Insider Ownership – Still run by the founder, who owns 11% of the stock. And total cash salary of the top five executives in 2015 came to just $1.3 million, according to Yahoo. They are clearly counting on a rise in the value of their stock. (The founder and CEO’s 11% of the stock is Class B stock with increased voting power, so he retains control of the decision making. He certainly seems to be doing well so far.)
Long Runway and Long Way to Grow – They are only handling maybe a half of one percent of all worldwide eCommerce Internet sales at present, and Internet sales are growing rapidly. They could probably compound 100% growth for another five years, and still have a wide open field in front of them. (I strongly doubt though that they actually can keep up 100% growth.)
And, in addition, in 2015 they introduced Shopify Plus, which goes after larger enterprises, and seems to be doing well, getting divisions of major companies signed up. They have over 1000 accounts already.
Absence of Debt – They have about $190 million in Cash and equivalents, and No Debt.
Easy to Follow, Covered by the Fool – They pass on this one.
Reasonable PE – They flunk on that one.
But what about that absence of earnings?
Well, first of all, they have six out of seven of those things I look for. As far as earnings, at this stage in their growth, they are trying to take over the world. When you are in hyper-growth mode, growing revenue at 100% per year, you have to plow back your profits to grow the business. It sounds reasonable to me, actually, but it means waiting for earnings, which I usually don’t like. However, they are only losing pennies per share, and have run up zero debt. I’ll accept that.
What are the risks? Let’s see.
No earnings? They keep expanding and expanding and don’t get around to taking profits?
A competitior comes along and replaces them? That’s hard to see right now. No one in their right mind would hire a smaller competitior just starting out when they could hire Shopify, so it would have to be one of the big companies. But Amazon just closed their platform and decided to go with Shopify, and eBay closed their unit that competed with Shopify in small to medium sized businesses, partly because they couldn’t compete.
Internet commerce goes away? Uh….
Conclusion
Growing like mad, knocking it out of the ball park, no profits yet, worth at least a look.
Best,
Saul
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