Shopify to quadruple revenue by 2021?

Investment Analysis Clubs Saul’s Investing Discussions
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On another board someone posted that Pacific Crest thinks Shopify will increase Revenue 300% by 2021. That’s an incredibly low-ball estimate!!! They are talking about quadrupling revenue in 5 years (2017, 18, 19, 20, 21). Let’s look at that:

In 2015 revenues were up 95.0%. In 2016 revenues were up 89.7%. If they kept up that 89.7% rate for five years (obviously impossible) they would increase revenue twenty three and a half times (2,350%), not the three times (300%) of Pacific Crest’s estimate.

Lets try some more realistic estimates. Say they drop their rate of increase by 10% per year. This year up 80%, then up 70% the next year, 60%, 50% and 40%. (Probably overly optimistic but who knows?). With that growth they’d be up 930%, still much better than Pacific Crest’s estimate.

Let’s go for even further slowing. Try a drop to 75% growth this year, 60% next year, then 50%, 40% and a sedate (for them) 30% the last year. Their growth of revenue by 2021 would be 664%.

It’s hard to get down to Pacific Crest’s estimate! Let’s try again and drop 20% this year to a growth rate of 70%, maybe 55% next year, and 45%, 35% and 25% (really sedate). That gets us down to an increase in revenue of 545% by the end of 2021!

I give up! I don’t see any realistic way to get them down to just quadrupling revenue (up 300%) by the end of 2021. Pacific Crest was definitely low-balling, so they can keep increasing their estimates.

Saul

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I try to be much more conservative than this. My recent calculations postulated a 20%, 25%, and 35% 5 year revenue growth rate. At all levels of growth rate, SHOP is still likely to appreciate from here. Most certainly not in a bubble given its current fundamentals. At 25% over 5 years revenues will more than triple during that period of time.

My experience is that growth does not slow in such a clean manner. It takes off, and then when it slows, it materially slows. Currently the analyst estimates have it materially slowing in 2017 to a bit more than 50%, and then in the 30%s in 2018. The good news with this is that expectations are not overly high for continued growth like we have seen, and that SHOP has a good chance to exceed these expectations going forward.

Long and short, if SHOP could continue to do as it has, that would be utterly awesome! But even if not, 25% 5 year growth CAGR is still outstanding with a triple, and SHOP is a rare company that may be able to exceed this as its numbers get larger.

Tinker

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Saul,

Here is the math. Actually, you could use your regular graph paper and draw a line and eyeball what is needed to get just a quadruple with a beginning 90% growth rate.

They are predicting a 32% CAGR.

If you make a simple assumption of growth deceleration of 1/3 each year, you get from 90%: 60%, 40%, 27%, 18%, 12%. Multiply all that out and I get sales of 3.74 times 2016 by end of 2021. People smarter than me can check the math. I am probably the last living engineering graduate who looks at a calculus book and says “whaaaa?”

Anyway a 1/3 deceleration per year sounds like the math level an analyst might make. (I should not say that, either. I took a Coursera course on the calculus for Black-Shoals (sp?) two years ago and make it only about 5 weeks!!) I guess some analysts can do that stuff that’s over my head.

KC, long SHOP (my top CAPS pick ever)

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so in this context of expected growth deceleration (albeit from a remarkable 90%) is the TTM P/S multiple of 15 deemed reasonably cheap?

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Folks,

of course you are all right with multiplying up the growth.

Me thinks the analysts here were a bit less accurate. I suspect they simply added the growth rates:
80% in year 1
70% in year 2
60% in year 3
50% in year 4
40% in year 5
Total = 300%

In their gutts they will know that adding instead of multiplying is coming in too low. They will book this as conservatism, feeling they made realistic growth assumptions and baked in a little reserve.

LNS

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Hi fireblade,

so in this context of expected growth deceleration (albeit from a remarkable 90%) is the TTM P/S multiple of 15 deemed reasonably cheap?

That, of course, is the crux of the matter. There is little doubt that Shopify will continue growing at a torrid growth but slowing rate.

A lot of this growth is already baked into the stock price. Question is how much.

LNS

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Hi KC,

You are reinforcing my point. You wrote: If you make a simple assumption of growth deceleration of 1/3 each year, you get … 60%, 40%, 27%, 18%, 12%. Multiply all that out and I get sales of 3.74 times 2016 by end of 2021.

I had written: I give up! I don’t see any realistic way to get them down to just quadrupling revenue (up 300%) by the end of 2021, and I don’t see your numbers as “realistic” in any way. Shopify growing at 18% and 12%? Nope. I really don’t see them growing by only 60% this year either. They grew at 86% in the December quarter, for gosh sakes. What’s going to make that fall to an average of 60% the very next year?

I understand the arithmetic of what they are saying, but not the reasoning. Look their rate of growth fell 5% annually from 95% in 2015, to 90% in in 2016. If they decreased their rate of growth this year by 5% sequentially every quarter, instead of annually, they’d still average about 75% growth of revenue for the year.

Saul

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Saul,

I intended to reinforce your point, not argue against it. What I posted is what it would take in deceleration of growth to get only the 5 year growth that Pacific Whoever projected. That is what it would take. So from there, one can look at it and ask, is that realistic? So, the thing is to be aware of any actual deceleration when it inevitably occurs, and look at the concurrent p/e direction. Remember SKX? Growth decelerating, p/e increasing until that nasty drop.

I don’t expect any deceleration of the kind I outlined any time soon. Someyear. As to how the deceleration happens, depends. If it is because of disruption, it could be rapid. If it is market saturation and some competition, it would more gradual in the manner I presented. I don’t know that it matters much.

Since SKX was a market saturation, it decelerated more as I presented. INFN was a different story.

Anyway, I’m long, not losing sleep over the matter.

KC

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I don’t expect any deceleration of the kind I outlined any time soon.

Hi KC, Thanks for clarifying.
Best,
Saul

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so in this context of expected growth deceleration (albeit from a remarkable 90%) is the TTM P/S multiple of 15 deemed reasonably cheap?

I’m afraid I’ve somehow appointed myself the board’s valuation guy…maybe TMF’s…but I have to respond because I did find this an interesting/provoking question, especially for this board.

When you traffic in growth stocks, you have a couple choices: live by the whims of momentum, or find a company you believe in and are willing to hold come what may. But I think either way, you have to have some idea of what SHOULD happen next. What should be true of a stock given what is true of the company. You have to have some way to value it, and that price has to be relative to something, otherwise you have no inkling of whether it’s currently cheap or expensive. That may matter less if your holding period is forever, because eventually it will be both.

Still, if you have 30 stocks you’d kind of like to buy, and you want to find the best 5 or 10 or 15, you have to evaluate which have the most potential. YELP is never going to grow like SHOP, but if it’s 1/5 the price and grows 1/3 as fast, which is the better deal? We need some way to answer these questions.

Tinker recently attempted to look at 2018 estimates, but this is difficult. For a lot of these companies, we don’t even have a good idea of what the shares outstanding will be by Dec 2018. Still, it’s probably good enough for back of the napkin math.

The point is, regardless of how you pick your numbers and assumptions, you need to have some way of estimating the potential of a company, and what the PS or PE or whatever of the stock should look like in the next couple years. This is what allowed me to load up on SHOP in November or December or whenever it was. I looked at my other companies, growing fast at 40% or whatever, and I said, hey, these companies will double in just a couple years, and profit will come when their business model takes off. Is a PS of 7 or 8 really so much? Some had a PS around 9 or 10. And here’s SHOP, also with a PS around 9 or 10. But it’s not growing at 40%, it’s growing at almost 100%. There’s NO DADGUM WAY ON EARTH that this company is not worth WAY more than these other companies. If SPLK has a PS of 9, SHOP should have a PS of 18 (…and now it almost does).

Again, it doesn’t matter (much) if you use TTM PS like me or 2018 PS like Tinker. What matters is you need some kind of framework to begin to think like this. Otherwise it’s tough to compare anything.

Is SHOP expensive at a PS of 17, or a FWD PS of 11, or a 2018 Fwd PS of 7, or whatever? Given that’s it’s growing faster than just about every other option out there, I might call it fairly valued. Depending on how you model it, how many years you assume it can grow faster than everything else, and what price everything else is currently fetching, then yes, it might even be possible to say SHOP is “reasonably cheap.” So it does depend how fast you think the growth acceleration will be. Which is my guess as to why Saul keyed in on that.

Bear

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thanks Bear, your answer consolidates the thinking behind the valuation discussion above in terms of revenue projections (PS ratios), and I wonder if there is another leg up in share price, moderate movement or consolidation when SHOP turns on the tap for profit and we the start to think in terms of PE.

Perhaps I am just trying to find reasons for my dramatic shift in sentiment on SHOP, going from ultra optimistic to cautious - the 100% increase in SP might have something to do with it

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Just for those who want to apply some pigeon math.

With stocks what you measure is compound annual growth. Mathematically how you do it is add 1 to the percentage of average growth and then ^ to the number of years of growth.

So, for example, if you think SHOP can grow at an annual compounded rate of 25% for the next 5 years the formula would be like so: 1.25^5 and that equals 3.05 or 305% growth.

At 35% you get 1.35^5=4.48 or 448%.

We forget how long 5 years is. 5 years ago Obama has just won his second term, Benghazi was just hitting the newspapers, ISIS did not exist in any meaningful form in the press, SHOP was not public, etc.

A company that can grow at a compounded annual rate of 20 or 25% for 5 years is extraordinary. Very few do so, and even fewer do so at higher rates of growth. It has s pure conjecture if any company can do so. Nevertheless with some companies you think they change their CAP and the TAM to do so.

Then you panic, is it all just baked into the share price anyways?

Take SHOP. Take it at a 5 year 25% compounded growth (which would require a marked slowdown given that SHOP will have much higher grow the in 2017 and most likely 2018. That means that SHOP’s revenues in 5 years will triple from what the trailing revenues are today. Trailing 12 month revs as an f 12 31 16 were $389 million. End of 2021 would then be revenues in excess of $1 billion and assumedly still growing.

Run your own numbers. Is it in a bubble? Is there no appreciation Left for long term holders? Keep in mind that CRM at much slower growth still maintains in excess of 7x sales valuation. Run your own numbers.

Look at VEEV to see the type of premium the market will give a company with a rock solid CAP. Or look to UA to see how a company with less CAP can be decimated when growth slows and marketshare declines.

Always good to put some numbers behind it.

In the long run companies like ISRG retain a premium for a very long period of time. Is SHOP deserving of a premium? At some point the premium may become so much that you are compelled to sell. At other times compelled to buy. This is not prognostication however, just present perception testing of how the world, voting w its dollars, in the holistic environment we are in, values he company. There is a lot of substance you can infer just from the numbers to understand what is built into the value f the stock, what is nto, and why the premium, and can it last.

This is why I called SHOP fairly valued. Nevertheless, the market appears to see more growth than this hypothetical future, and perhaps more CAP and perhaps a lot larger TAM. Larger CAP means laonger period of time of premium returns (not reverting to the mean), and longer TAM means much longer compounded growth period than the mean company, and thus the premium. That is what is baked in the numbers.

This has also been the press narrative of late fro SHOP. Focusing n high switch Costs, with its competitor running gross merchandise sales that are nearly 10x SHOPS GMV, yet still growing, talk of secular move to web, and that SHOP is the easiest and perhaps most complete tool (depending on opinion) that enables this, with awesome management, culture, vision, and quadrupling headquarters, in the Canadian city that is pushing to be the next Silicon Valley.

The companies financial results, business momentum, all support. These claims. The narrative will change over time. But look for example at VEEV again. Revenue grow th rate is materially slowing, but its premium has gone up if anythzing, why?

Because it’s CAP is huge, and the market believes VEEV can and will expand its TAM. Long way down if the company disappoints, but plenty F huge rewards long term if they do so. Thus some fear is built into the valuatiOn, as there is room for upside, but so is a lot of confidence.

The fear is wha t provides the upside potential, the confidence is a signal tha t investors sees some very good potential. Thus wh truly great companies are always expensive, but always have that fear discount as well relative to their perceived futures, and thus why they can p reduce such great returns as the portion of the business tha t creates confidence allows the company to no t revert to the mean and thus defeat the fear, that creates the wall of worry that these stocks climb up over time as they fundamentally p erform.

Tinker

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1.25^5 and that equals 3.05 or 305% growth.

Not to quibble, but growth from 1 to 3.05 is 205% growth. You started with the 1.

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However you want to phrase it you take current revenue and multiply it by 3.05 to get the future revenue. I.e. 5 year 25% compounded growth will triple your money. Try it by hand if you want.

Tinker

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yes but will it triple your money in 5 years from SHOP? It ain’t cheap now.

Still for merchants SHOP products are a bargain,less than what many pay for office coffee.

A high conviction hold for me. Less paradigm breaking than TSLA but safer too. Less dependent on the possible reception of future products than NVDA.

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Mauser, that is why I said SHOP seems fairly valued here. From here I get around. Double to 120% increase or so in 5 years. Market beating return, but less than we like to see.

This said, that is not a prediction, just a tool to put perspective on the stock.

Look at CRM, that I am using as a comparison to VEEV, and their still very high multiple despite approaching $10 billion in revenues.

A company like SHOP, if fundamental CAP and TAM remain intact, growing like that is likely to exceed expectation and maintain a valuation multiple that is still premium. Thus why some companies always seem way too expensive, but never buy em we do, and always fret we are.

I have way too much capital gains on SHOP so I ant selling until time to sell. I own a ton of VEEV and am ofmsame mindset.

I own ZEN, but ZEN postulatesmout to a triple or quadruple stock return. Thereby, although “Expensive” is quite undervalued based upon moderate expectations from current valuation.

Stock price on ZEN indicates either deteriorating CAP, or recovery from a recent FUD event that is still ongoing. But ZEN is actually cheap believe it or not.

Tinker

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Hi Tinker,

Thanks for sharing your thoughts. One question, what does CAP stand for? I know what TAM is. Thanks!

Zangwei

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Competitive advantage period. Or more accurately sustainable competitive advantage period.

In economics profits tend to zero in a truly competitive market (that is adjysted for risk and cost of capital). Companies revert to this mean level.

But a company with a true sustainable competitive advantage can earn more than its cost of capital and does not revert to the mean.

Or more simply how long and how big is a company’s competitive advantage so that competitors cannot reduce their profits to the cost of capital or worse.

High switching costs, like Windows once enjoyed is one example of a very prolonged and extreme large CAP.

Conversely, SSYS in 3D printing found it had little in regard to CAP.

In times of fast growth, fast growth can be mistaken for competitive advantage, but really is just shortage of supply that eventually gets filled when growth slows.

Anyways just a short hand way to say how sustainable is a company’s competitive advantage period, so that you can determine if superior returns will last or be short term.

Tinker

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Thanks Tinker!

Now I got it. Great explanation. By the way, this is #2 of the David Gardner’s 6 signs of Rule Breakers.

Zangwei

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Saul in March 2017: On another board someone posted that Pacific Crest thinks Shopify will increase Revenue 300% by 2021. That’s an incredibly low-ball estimate!!! They are talking about quadrupling revenue in 5 years (2017, 18, 19, 20, 21). Let’s look at that:

Say they drop their rate of increase by 10% per year. This year up 80%, then up 70% the next year, 60%, 50% and 40%. (Probably overly optimistic but who knows?). With that growth they’d be up 930%, still much better than Pacific Crest’s estimate.

We still have a quarter to go, but it looks like you underestimated, Saul. :slight_smile: Shopify 2016 revenue was $389m, and in the last 12 months it’s $4,209m. So it is up 982%, not 930%. You were way off.

Obviously I’m kidding and Saul’s estimate from nearly 5 years ago was almost perfect, and this is absolutely incredible, but it’s chronicled right here on this board. Lately I’m enjoying reading through old posts. We’ve all learned a lot since 2016/2017. Even Saul I think, and sometimes it seems he knew everything back then!

Hope everyone had a chance to take a break and spend some time with family around Thanksgiving. I’m thankful for a lot of things, and this board is definitely high on the list!

Bear

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