SHOP - Shopify

[Jurgis]

I'm so old, I actually remember reading this Scott McNealy quote in Businessweek when it came out in 2002 in a glossy magazine. McNealy, the CEO of Sun Microsystems thought things got crazy in the DotCom bubble because Sun was selling for 10x Revenues:

 

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"— Scott McNealy, Business Week, 2002

 

But that just seems quaint now, doesn't it. SHOP is selling at almost 50x 2019 revenues. You know, because it is going to be the next Amazon, and it has unlimited growth potential as basically an intermediary for small mom and pop on-line businesses. By collecting 2.9% of its merchant's sales, and a small fixed fee, SHOP would only need to get 36 million merchants, and $3 trillion in sales moving through their platform to get revenues up to $100 billion from $1.5Bn where they currently sit. That all seems completely plausible.

 

M.

 

that all sounds nice. but now rewrite what you wrote, but change SHOP to AMZN and pretend it's 1998. amazon used to trade at what? 40x sales in the 90s? That turned out ok. and back then it was "just a bookstore". it was ONLY collecting a small fee on each sale of...a book. how quaint! They used their customer base to expand into other businesses, something SHOP could potentially do.

 

 

I'm not even advocating for SHOP, but your analysis is way too simplistic.

 

I am not advocating for SHOP as well, but Scott McNealy set up a rather straw-man argument.

 

A company trading at 10x revenues might be trading at 20 P/E if it has 50% margin or 25 P/E if it has 40% margin. Plus saying "10x revenues" does not account for growth at all. If company has 50% growth, it would be trading 4.4x revenues in 2 years assuming no price change, which could be 15PE with ~30% margin.

[writser]

What venture capitalist invests at a $75 billion valuation?

 

Masayoshi Son. Duh.

[Castanza]

I'm so old, I actually remember reading this Scott McNealy quote in Businessweek when it came out in 2002 in a glossy magazine. McNealy, the CEO of Sun Microsystems thought things got crazy in the DotCom bubble because Sun was selling for 10x Revenues:

 

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"— Scott McNealy, Business Week, 2002

 

But that just seems quaint now, doesn't it. SHOP is selling at almost 50x 2019 revenues. You know, because it is going to be the next Amazon, and it has unlimited growth potential as basically an intermediary for small mom and pop on-line businesses. By collecting 2.9% of its merchant's sales, and a small fixed fee, SHOP would only need to get 36 million merchants, and $3 trillion in sales moving through their platform to get revenues up to $100 billion from $1.5Bn where they currently sit. That all seems completely plausible.

 

M.

 

that all sounds nice. but now rewrite what you wrote, but change SHOP to AMZN and pretend it's 1998. amazon used to trade at what? 40x sales in the 90s? That turned out ok. and back then it was "just a bookstore". it was ONLY collecting a small fee on each sale of...a book. how quaint! They used their customer base to expand into other businesses, something SHOP could potentially do.

 

 

I'm not even advocating for SHOP, but your analysis is way too simplistic.

 

Sadly, simplistic analyses are all I'm capable of.

 

But just think of how fortunate we are to live in this time. While our predecessors had to settle for just one Amazon, and one Apple, we have dozens of each just waiting to be scooped up by those smart enough to have learnt from the earlier generation's mistakes of omission. I for one am holding out for the next Amazon that is selling for 100x sales. None of that half-baked 50x sales stuff. I mean it's just capital, and if you're not willing to risk it (or some fraction of it) hitting a grand slam, are you even really an investor?

 

M.

 

What would you call Venture Capitalists? Our Google's Moonshot division?

 

I try to be open minded to different strategies and while generally its a value oriented approach, theres more than one way to skin a cat.

 

Venture Capitalists and Google's Moonshot division are the only thing keeping me sane these days. Just when I think the world has gone to hell in a hand basket, I think of the Venture Capitalists, and Google's Moonshot division and my faith in humanity is restored. God bless them one and all, doing the Lord's work.

 

M.

 

"We principally generate revenues through the sale of subscriptions to our platform and the sale of additional solutions to our merchants. Our subscription plans typically have a one-month term, although a small percentage of our merchants have annual or multi-year subscription terms. Our merchants have no obligation to renew their subscriptions after their subscription term expires. As a result, even though the number of merchants using our platform has grown rapidly in recent years, there can be no assurance that we will be able to retain these merchants. In fact, we have historically experienced merchant turnover as a result of many of our merchants being SMBs that are more susceptible than larger businesses to general economic conditions and other risks affecting their businesses. Further, many of these SMBs are in the entrepreneurial stage of their development and there is no guarantee that their businesses will succeed. Our costs associated with subscription renewals are substantially lower than costs associated with generating revenue from new merchants or costs associated with generating sales of additional solutions to existing merchants. Therefore, if we are unable to retain merchants, even if such losses are offset by an increase in new merchants or an increase in other revenues, our operating results could be adversely impacted."

 

But yeah, there is always the next sucker in line to take a shot and pay that subscription. Maybe that's the beauty of Shopify?

 

@BG2008, it's worth noting a lot of these "store fronts" require outsourcing for further web development. But yeah, there is not doubt it's a good product!

[mloub]

I'm so old, I actually remember reading this Scott McNealy quote in Businessweek when it came out in 2002 in a glossy magazine. McNealy, the CEO of Sun Microsystems thought things got crazy in the DotCom bubble because Sun was selling for 10x Revenues:

 

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"— Scott McNealy, Business Week, 2002

 

But that just seems quaint now, doesn't it. SHOP is selling at almost 50x 2019 revenues. You know, because it is going to be the next Amazon, and it has unlimited growth potential as basically an intermediary for small mom and pop on-line businesses. By collecting 2.9% of its merchant's sales, and a small fixed fee, SHOP would only need to get 36 million merchants, and $3 trillion in sales moving through their platform to get revenues up to $100 billion from $1.5Bn where they currently sit. That all seems completely plausible.

 

M.

 

that all sounds nice. but now rewrite what you wrote, but change SHOP to AMZN and pretend it's 1998. amazon used to trade at what? 40x sales in the 90s? That turned out ok. and back then it was "just a bookstore". it was ONLY collecting a small fee on each sale of...a book. how quaint! They used their customer base to expand into other businesses, something SHOP could potentially do.

 

 

I'm not even advocating for SHOP, but your analysis is way too simplistic.

 

I am not advocating for SHOP as well, but Scott McNealy set up a rather straw-man argument.

 

A company trading at 10x revenues might be trading at 20 P/E if it has 50% margin or 25 P/E if it has 40% margin. Plus saying "10x revenues" does not account for growth at all. If company has 50% growth, it would be trading 4.4x revenues in 2 years assuming no price change, which could be 15PE with ~30% margin.

 

Agreed! Now if I do the same math for SHOP...wait, no, look over here instead: Bobble heads!

https://www.bobblesgalore.com/

 

 

 

[SHDL]

A great framework for investing is where you take a flyer on an asset with a large likelihood of a wipe out downside, but a small chance of a home run.

 

This is actually a key part of how certain equity indexes like the S&P 500 did so well, at least in recent years. They basically bought the FANGMANs and co. early and held on. They also owned a bunch of mediocre/bad stuff too but the winners were successful enough that the basket as a whole did quite well.

 

Now whether this strategy will keep working well going forward is another matter...

[mloub]

A great framework for investing is where you take a flyer on an asset with a large likelihood of a wipe out downside, but a small chance of a home run.

 

This is actually a key part of how certain equity indexes like the S&P 500 did so well, at least in recent years. They basically bought the FANGMANs and co. early and held on. They also owned a bunch of mediocre/bad stuff too but the winners were successful enough that the basket as a whole did quite well.

 

Now whether this strategy will keep working well going forward is another matter...

 

Exactly! Just like the nifty-fifty, only much, much better. The nifty-fifty ended in tears, when it is plain for all to see that this time is different. People were so simple back then. Polaroids and Xerox copiers. What a hoot.

 

M.

 

[coc]

The problem with paying 35x revenues is you have zero margin of safety.

 

Imagine buying the whole business. Let's say you want a 10% return starting five years out to justify buying the company. On today's price that's ~$7.2 billion after tax profit. They're likely to issue shares to employees so you might need $8 billion or more to get 10%, but let's call it $8 billion.

 

To achieve $8 billion, let's generously assume SHOP will have 20% after-tax margins - a true tech powerhouse. That means they'll need $40 billion in revenue in five years. 20x today's number, or 82% compounded per year.

 

It's possible, but note that if they compound at a mere 40% per year and their margin is 10% after tax, your return at that point will still be probably 1% on your $70B+ layout today.

 

That math is...challenging for a business with no profits to date. The reason people are comfortable with it is they're not doing that kind of math - they're using speculator math. (If it trades at a mere 20x revenue in 5 years and has revenue of $10 billion...etc.)

[fareastwarriors]

I got out at 400s where I thought surely this can't go any higher. Sure enough I was totally  wrong.

 

;D

 

 

Who's actually long SHOP here?

valueinvestor?

[rkbabang]

I got out at 400s where I thought surely this can't go any higher. Sure enough I was totally  wrong.

 

;D

 

 

Who's actually long SHOP here?

 

I just sold half of my position today at $628.  I bought at $140, sold a third of that last summer at $320, and today sold half of what remained (another 1/3rd of original position) at $628.  I'm going to hold the rest.  SHOP isn't going to $0.

[Xerxes]

I own Lightspeed, the Montreal-based payment system, and in my dream scenario, Shopify will issue its expensive shares to buy Lightspeed, and rescue me.

[matts]

I own Lightspeed, the Montreal-based payment system, and in my dream scenario, Shopify will issue its expensive shares to buy Lightspeed, and rescue me.

 

Lightspeed's only selling at ~18x sales. How quaint. Call me when its up to ~50x. No time for minnows in this once in a lifetime bull market.

 

M.

 

dude, why are you posting like a smug little child? People are trying to discuss this stock and you are adding no value.

[mloub]

The problem with paying 35x revenues is you have zero margin of safety.

 

Imagine buying the whole business. Let's say you want a 10% return starting five years out to justify buying the company. On today's price that's ~$7.2 billion after tax profit. They're likely to issue shares to employees so you might need $8 billion or more to get 10%, but let's call it $8 billion.

 

To achieve $8 billion, let's generously assume SHOP will have 20% after-tax margins - a true tech powerhouse. That means they'll need $40 billion in revenue in five years. 20x today's number, or 82% compounded per year.

 

It's possible, but note that if they compound at a mere 40% per year and their margin is 10% after tax, your return at that point will still be probably 1% on your $70B+ layout today.

 

That math is...challenging for a business with no profits to date. The reason people are comfortable with it is they're not doing that kind of math - they're using speculator math. (If it trades at a mere 20x revenue in 5 years and has revenue of $10 billion...etc.)

 

No sweat! I mean, they've been compounding at 82% per year so far, right? (Checks notes). I mean scratch that...Look over here. Bobbleheads!

 

https://www.bobblesgalore.com/

 

M.

 

[Gregmal]

Its a case of modern value investor derangement syndrome. They missed the boat. Have had shitty returns, and can only bemoan and deride those whom are making money through snarky intellectual blabber or requoting old value investor adages... Its OK though. We shouldn't mind the people in the stands. Whether they cheer or boo, they pay a price.

[mloub]

But can't you see, I'm chastened after my years of terrible returns. I see the light, and I am ready to change. And that is why, after a great deal of introspection and study of the current market, I'd like to announce here on COBF, the formation of my new Venture Capital Fund, Accelerant Capital Partners, because "Every Capital fire needs an Accelerant" .

 

M.

 

[rb]

Its a case of modern value investor derangement syndrome. They missed the boat. Have had shitty returns, and can only bemoan and deride those whom are making money through snarky intellectual blabber or requoting old value investor adages... Its OK though. We shouldn't mind the people in the stands. Whether they cheer or boo, they pay a price.

::)

[mloub]

Damnit! Spoke too soon. These beautiful geniuses beat me to it.

 

http://accelerantcapital.com/

 

M.

 

[jschembs]

Its a case of modern value investor derangement syndrome. They missed the boat. Have had shitty returns, and can only bemoan and deride those whom are making money through snarky intellectual blabber or requoting old value investor adages... Its OK though. We shouldn't mind the people in the stands. Whether they cheer or boo, they pay a price.

 

Going to find a frame for this one.

[mloub]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

[Gregmal]

I mean, I have no position here. Have said if I had to take one, I'd short it, but also can see why people may be excited...What I dont get is the impulsive need to belittled people interested in an investment because "you" do not understand it or because it doesnt make sense to "you". If you feel that strongly why not take the other side of the trade? Its a case where it seems folks rather be right than make money, not different than whats gone on with Amazon or Tesla or many other names. Whether you like it or dont, its amusing when folks who were adamant bears at $30 still run their mouths and mock those who own it at $700 or $2000...

[mloub]

I own Lightspeed, the Montreal-based payment system, and in my dream scenario, Shopify will issue its expensive shares to buy Lightspeed, and rescue me.

 

Lightspeed's only selling at ~18x sales. How quaint. Call me when its up to ~50x. No time for minnows in this once in a lifetime bull market.

 

M.

 

dude, why are you posting like a smug little child? People are trying to discuss this stock and you are adding no value.

 

Hey man, I'm on your team. No need to get defensive. I'm new to this game, and just getting the hang of the lingo. What I meant to say is 18x sales and no profit is super awesome. But you can do better. Just look at SHOP.

 

M.

 

[SHDL]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

Double Exponential Capital. Slogan: “Compounds so powerfully your base doesn’t even matter!”

[mloub]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

Double Exponential Capital. Slogan: “Compounds so powerfully the base doesn’t matter.”

 

Dibs! Dibs! Dibs! I trust you're all gentle men and women here and no one will try to steal the domain out from under me.

 

M.

 

[thepupil]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

given that your contribution to board analysis and ideas (outside of the thread I refuse to read) appears to be 8-10 year old posts on such long term compounders as Rainmaker Entertainment, Pinnacle Airlines, and TEPCO, how about "Negative Nancy Capital Management Partners Global Limited"?

 

we get it. you don't like fast growth tech. what do you like?

[mloub]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

given that your contribution to board analysis and ideas (outside of the thread I refuse to read) appears to be 8-10 year old posts on such long term compounders as Rainmaker Entertainment, Pinnacle Airlines, and TEPCO, how about "Negative Nancy Capital Management Partners Global Limited"?

 

we get it. you don't like fast growth tech. what do you like?

 

You missed my 11 year old posts about ATSG, and 9 year old posts on Gyrodyne. The March, 2009 post on ATSG brought a tear to my eye. But I realize that is all gargabe now. Which awesome growth company should I start with first to regain the board's trust? Zoom, SHOP, "a company to be formed, for a purpose to be determined at a future time"?

 

What I used to like doesn't exist anymore, so no point talking about the past.

 

 

M.

 

EDIT: And for the record, my post on the Rainmaker thread on July, 2012 was simply to define the acronym TIA for someone who did not know what it meant. I was never an investor or porponent of Rainmaker. And I did not inhale, and all that other stuff...

 

[thepupil]

Quick, I need a new name idea. Something that evokes a searing fire, so that my firm is associated with almost unbelievable growth, like an out of control wildfire....

 

Something like "Combustible Capital", "Explosive Dynamic Partners"...a little help please.

 

M.

 

given that your contribution to board analysis and ideas (outside of the thread I refuse to read) appears to be 8-10 year old posts on such long term compounders as Rainmaker Entertainment, Pinnacle Airlines, and TEPCO, how about "Negative Nancy Capital Management Partners Global Limited"?

 

we get it. you don't like fast growth tech. what do you like?

 

You missed my 11 year old posts about ATSG, and 9 year old posts on Gyrodyne. The March, 2009 post on ATSG brought a tear to my eye. But I realize that is all gargabe now. Which awesome growth company should I start with first to regain the board's trust? Zoom, SHOP, "a company to be formed, for a purpose to be determined at a future time"?

 

What I used to like doesn't exist anymore, so no point talking about the past.

 

M.

 

EDIT: And for the record, my post on the Rainmaker thread on July, 2012 was simply to define the acronym TIA for someone who did not know what it meant. I was never an investor or porponent of Rainmaker. And I did not inhale, and all that other stuff...

 

fair, i did a quick glance and picked out three companies that seemed like shitty ones because that's what one does to someone who is spamming non-stop and taking a mildly amusing joke that had a shelf life of 1 to 2 posts well beyond that.

 

so what do you like?

 

please start a thread with your longs to pair against your SHOP short