SHOP - Shopify

[valueinvestor]

Why is Shopify the only option? Shopify is not aggregating data (a la Google and Facebook) or inventory (a la Amazon). Shopify is not an intermediary between the consumer and the merchant. In fact, one of the biggest values that Shopify brings to the table for merchants is that it is easy for them to integrate and optimize through those platforms.

 

The biggest risk, that I think is often overlooked when analyzing SHOP, is that they seem to be destined to lose their most successful customers. Shopify is an amazing and totally unrivalled product if you are starting out and you want to hit the ground running. It's also very good if you are a brick and mortar retailer who is trying to integrate eCommerce into your existing business model.

 

Imagine there is a new emerging category in online retail. 1,000 startups launch through Shopify. By the nature of search engine optimization and other factors, outgrow the rest by orders of magnitude. Being on Shopify, is not going to give any of those 10 competitors any competitive advantage. At this stage, things like page loading speeds are starting to critically matter, because the top 3 places in Google searches are going to give 10 times more traffic than the places below.

 

The needs of these companies are going to outgrow the commoditized nature of the Shopify business model. Not saying that Shopify is not a great product or that SHOP cannot become a $500 billion company in the future. Just saying that at $112 billion in market cap, an awful lot of expectation is already priced in.

 

1. Why is Shopify the only option? It's the conclusion I've made when trying out different e-commerce platforms and running different e-commerce websites with each of the platforms, and working with others. From what Shopify is spending on R&D (real R&D - not Valeant R&D) and comparing the problems they are trying to solve versus Magento, BigCommerce, and more - I don't think it's hard to see they will be the only option in the future. Shopify's R&D equates to the entire revenue of each of its competitors.

 

2. Just because Shopify doesn't aggregate, it does not put them at a disadvantage. Platforms that facilitate users and third parties versus aggregators that intermediate and control it - makes them different - not that one is better or the other. What is the value of Shopify Fulfilment? Shopify Capital? Shopify Balance? Shopify Apps? There's an advantage to have an overvalued stock and be able to fund these initiatives.

 

3. I would be quite appreciative if you can provide source material for their best customers leaving the platform. I've only seen the opposite - such as Gymshark migrating to Magento for "faster speeds" and moving back to Shopify.

 

4. SEO is not really necessary for SMB. I'm in the field where a company with bad SEO initially still outperforms competitors with great SEO through paid ads and data. Am I saying SEO is useless? No. I'm just saying Shopify customers can be happy even with really bad SEO.

 

Reading your posts - I think we agree. A lot has been priced in with Shopify, and I'm not saying one should invest a considerable amount into it. However, I think it could be smart to find an entry point - like what was offered in March and make a small position and let it run or average down.

 

Especially if we inverted this - the valid reasoning you've provided would've made Shopify uninvestable since Day 1 of their IPO.

 

However to come to everyone's point?

 

At this price point - does a lot need to happen to see a 90% decline? No.

 

versus

 

At this price point - does a lot need to happen to see a 90% increase? Yes - as we saw with the last quarter earnings, stock is still down double digits even though 50%+ growth.

[Guest roark33]

I am always skeptical when people say, look X company is spending so much more than their competitors on R&D. 

 

 

That's not always the best metric.  Lots of failing companies spent a ton on R&D, just not very effectively...

[valueinvestor]

Me too.

 

Regardless, one has to make a decision whether their R&D has merit or not.

 

To me with what they are offering - it seems like it is.

[Sportgamma]

Reading your posts - I think we agree. A lot has been priced in with Shopify, and I'm not saying one should invest a considerable amount into it. However, I think it could be smart to find an entry point - like what was offered in March and make a small position and let it run or average down.

 

We both agree that Shopify is a fantastic business model and that finding an entry point is tricky.

 

Let's assume that Shopify is a $500 billion company in 10 years. How many +$500 billion companies are there? 10, maybe 12? Not sure.

 

Microsoft trades at about 10x sales, Facebook also about 10, Visa is at about 14 times sales. So, let's assume that by the time that SHOP trades at $500b the PS ratio is around 12. At about $2.5b in revenues, they would need a CAGR of 33% for 10 years to do that. Then you need to factor in the increased share count from SBC over those 10 years, so the required growth rate required for 5x on a per-share basis is probably a bit higher.

 

5x in 10 years is an annual return of 17.5%.

 

My concern would be that Microsoft, Facebook, Visa, et al, have historically not traded at +10 times sales. In fact, Microsoft was trading at 5 times sales less than two years ago. To a large extent, an investment in these companies is a bet on interest rates staying low.

 

So I guess what I am saying is that for Shopify to be a +15% return per year investment, the company needs to execute their growth plan perfectly, become one of the most 20-40 valuable companies in the world and it also requires interest rates to stay low to keep multiples up for the foreseeable future.

 

I just don't like the risk-reward at these multiples. Tech is the mother of survivorship bias and we forget the names of the fallen angels all too easily.

[Liberty]

I am always skeptical when people say, look X company is spending so much more than their competitors on R&D. 

 

 

That's not always the best metric.  Lots of failing companies spent a ton on R&D, just not very effectively...

 

Yeah, R&D effectiveness has to be taken into account. How much is Twitter spending on R&D?

[valueinvestor]

Nothing to add

 

It's nice to see a thread where posters see post-to-post  ;D, rather than ego-to-ego.

 

Reading your posts - I think we agree. A lot has been priced in with Shopify, and I'm not saying one should invest a considerable amount into it. However, I think it could be smart to find an entry point - like what was offered in March and make a small position and let it run or average down.

 

We both agree that Shopify is a fantastic business model and that finding an entry point is tricky.

 

Let's assume that Shopify is a $500 billion company in 10 years. How many +$500 billion companies are there? 10, maybe 12? Not sure.

 

Microsoft trades at about 10x sales, Facebook also about 10, Visa is at about 14 times sales. So, let's assume that by the time that SHOP trades at $500b the PS ratio is around 12. At about $2.5b in revenues, they would need a CAGR of 33% for 10 years to do that. Then you need to factor in the increased share count from SBC over those 10 years, so the required growth rate required for 5x on a per-share basis is probably a bit higher.

 

5x in 10 years is an annual return of 17.5%.

 

My concern would be that Microsoft, Facebook, Visa, et al, have historically not traded at +10 times sales. In fact, Microsoft was trading at 5 times sales less than two years ago. To a large extent, an investment in these companies is a bet on interest rates staying low.

 

So I guess what I am saying is that for Shopify to be a +15% return per year investment, the company needs to execute their growth plan perfectly, become one of the most 20-40 valuable companies in the world and it also requires interest rates to stay low to keep multiples up for the foreseeable future.

 

I just don't like the risk-reward at these multiples. Tech is the mother of survivorship bias and we forget the names of the fallen angels all too easily.

 

Funny you mentioned, survivorship bias - I thought about it too - but the way I look at it is I'm not a great macro investor but I can check if I have any biases.

 

Not sure if I'm using the term correctly, don't really have time to check but I thought I had survivorship bias when thinking about price-to-sales of the apst until I ran into hindsight bias.

 

Who says price-to-sales can't go higher? The past?

 

There could be a future where price-to-sales is higher, especially for Canadian tech equities from ETF flows to a smaller number of tech companies. Even more possible, there can be a world where price-to-sales is high while PE ratios are at a reasonable rate, since profit margins are higher due to tech efficiencies. On a macro level, Nasdaq's at 20 right now versus 30 in year 2000 and that's when interest rates were at 6.5% and inflation at 4%

 

Now we're at close 1% inflation and 0% interest rates. I do not think we're as extreme in terms of valuation.

 

However I maybe reading the tea leaves wrong.

 

Regardless, I'm happy to figure out the truth on another thread.

 

On a micro/fundamental perspective, the pandemic provided a huge tailwind - 33% CAGR is not unfathomable and there's optionality from "di-worsifying" into other businesses. Other than the past, I don't think there's a better time in initiating a small position when the stock went down on great news! Shows that there's some sensibility in the markets.

[Liberty]

https://www.nytimes.com/2020/11/24/magazine/shopify.html

[valueinvestor]

https://www.cbc.ca/news/business/shopify-affirm-1.5809503#:~:text=Affirm%20filed%20paperwork%20this%20week,company%20for%20a%20penny%20apiece.

 

I think this was spoken about but a warrant to buy a possibly $10B company on IPO, possibly worth more afterwards for $200K is quite a home run.

 

Shopify had $170M in equity investments.

 

Not sure if this was lucky, but the market responded well. I sold a meaningful portion, as I never knew affirm was going to IPO this year. Under the impression, it was years out, but hey - we can't get them all.

[Liberty]

Good interview with Tobi:

 

https://www.theobservereffect.org/tobi.html

[Aurelius]

Hey Liberty,

do you own SHOP?

 

Fun fact: today SHOP is worth the same as AMZN was worth when I initially invested in it back in late '14. I really have to credit Josh Tarasoff at Greenlea Lane Capital Management for making the case for AMZN.

 

My failure since has been to not use that same framework for other businesses with similar business models as AMZN (e.g. the 3rd party model). I've never even looked closely at SHOP. I recently read SHOP's sellers did more business at black friday than the 3rd party sellers did at AMZN. That is astonishing. I wonder how SHOP compares to the 3rd party sellers at AMZN at a yearly basis? I suppose I should look into that  ::)

 

To my defence AMZN has worked so wonderfully well and is such a massively over seized position for me. I've been sitting on my hands and as years have passed I've done less and less investment work. But seeing how well SHOP has done is quite something.

 

Congrats to all the longs!

 

[rkbabang]

Congrats to all the longs!

 

I bought a small tracking position to keep tabs on it and to try to decide if I wanted to buy more.  I never bought more, unfortunately, and my small position is up more than 6X, now 4% of my portfolio.

 

[Liberty]

Q4: https://news.shopify.com/shopify-announces-fourth-quarter-and-full-year-2020-financial-results

 

Fourth-Quarter Revenue Grows 94% on GMV Growth of 99% Year on Year

Full-Year 2020 Revenue Grows 86% on GMV Growth of 96% Year on Year

GMV Exceeds $41 Billion for the Fourth Quarter and Reaches $120 Billion for 2020