Shopify

[weijian]

Some time ago, I first read about Shopify been the Amazon killer. An interesting introduction into Shopify by a Shopify employee, for all the "old fashioned" people like me.. 

Alex Danco - Shopify: The E-commerce On-Ramp

- Operating system for online merchants and enabling entrepreneurship.

- Help to interface the merchant with payments, logistics, selling channels or even connecting merchants between each other). Allow 3rd parties to sell apps to their customers (very similar to Apple/Android app stores)

- Amazon is a low trust commerce system. Shopify wants to do high trust commerce systems.

https://www.joincolossus.com/episodes/85...tab=blocks

Shopify helps retailers to create their own e-commerce platforms without the initial investment requirement as it offers wide range of e-commerce platform templates which can be customised to satisfy different branding requirements. Users need to pay only monthly subscription fee to Shopify and use their e-commerce platform to attract new consumers and sell their products. The company offers subscription packages ranging from $29 to $2,000+.

https://seekingalpha.com/article/4472477...ext-decade

[Wildreamz]

Great company.. I have a draft post write up on it in early 2018, but never published it in Valuebuddies, since I felt that fellow buddies more focused on quantitative analysis of past results probably shy away from high multiple, "non-profitable" (back then) names like Shopify; where most of it's value is derived from future cash flow projections.

It's basically the "operating system" of modern commerce. Unlike Amazon, it does not sell it's own merchandise, and does not compete with sellers on their platform (https://www.forbes.com/sites/petercohan/...4d2c6d7d9d). It is also asset-light; hence, unit economics is better than Amazon. In fact, Amazon used to have a product competing with Shopify, and abandoned it in 2015: https://www.vox.com/2015/3/18/11560456/a...hopify-and

As sellers on the platform increases, so do developers, making the platform more valuable for both parties; ie. a positive flywheel effect.

Current multiple may seem high, but growth seems durable, which is the most important aspect of a long-term compounder. Hence, I'm rather comfortable holding it here. Unclear if it's the best investment choice right now to initiate a new position though.

(vested)

[weijian]

Hi wildreamz,
We owe it to ourselves to disrupt ourselves. Since we expect the Mgt of the companies we invest in, to disrupt themselves, we shouldn't ignore the same sort of disruption within ourselves.

Feel free to publish your analysis on VB.com. Of course, there is no obligation (and there is also no reward as well). With the exception of chart reading and price-action only posts, VB.com welcomes all sort of thoughtful analysis, be it qualitative or quantitative.

There is absolutely no reason why value has to stay within the boundaries of quantitative, when the principles of value investing are actually timeless.

Moderator

[weijian]

With the recent (massive) pull back of market prices for many tech firms that are supposedly valued based on revenue multiples (VBs rightfully believe this is absolute BS), I thought there might be some of them providing sufficient "value" proposition. Shopify might be 1 of them if one can (1) put on some imagination, (2) and a robust valuation method using reasonable assumptions.

Shopify’s Evolution

That is why it is a good thing that Shopify is integrating elsewhere in its business: profits in a value chain follow integration, and the more that Shopify is intertwined with the biggest players the more it needs to find other ways to differentiate. Shop Pay is already a massive win, and fulfillment has the chance to be another one; advertising shouldn’t be far behind.

https://stratechery.com/2022/shopifys-evolution/

[weijian]

Is it a high probability event that E-commerce (and all things that got a tailwind from Covid-19) will revert to "pre covid19 trajectory"? (for example, luxury watches/products as well? )

Shopify will cut 10% of its staff, with most workers gone by day's end

"We bet that the channel mix - the share of dollars that travel through e-commerce rather than physical retail - would permanently leap ahead by 5 or even 10 years" because of the pandemic, Lutke wrote.

"It's now clear that bet didn't pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point."

https://www.businesstimes.com.sg/consume...y-days-end

[CY09]

Spotify released its results today. Revenue and revenue outlook performed above analyst estimates, however its margins was lower due to cost of services and advertising cost increasing. This too was the same for Netflix, revenue above expectation, margins fell.

In both cases, share prices have rallied. In my view, it is likely we are still in the same mess where beating revenue estimates while ignoring margins is still good.

Shopify on the contrary has a decrease in both meeting revenue expectations and margins. This is why it is sold down. The bar has been set rather low where a growth above analysts' set revenue expectations calls for celebration. Unfortunately for shopify, its not even able to grow its revenue based on its latest Q2 financial results

[Wildreamz]

There are short-term bumps and long term trends. Focusing on price action in the short-term, might miss the larger picture in the long term. 

The main issue with Shopify this quarter is temporary "over capacity" (over-hiring) and macro. In the broader picture, in 2022 they have strengthened their offerings with the acquisition of Deliverr (fulfilment), Shopify Audiences (adtech). Despite macro-headwinds (inflation, supply-chain etc) revenue still grew 16% above 2021 numbers (Amazon's recent quarters has only managed to print single digit revenue growth). 

In context, are they in a position of strength or weakness?

(vested)

[CY09]

In terms of cashflow, the company has been able to maintain a positive cashflow ops due to the large stock compensation it pays to employees. If this was a cash expense, the company will be cash flow negative before working capital changes.

Of a scenario of Shopify collapsing due to a cash crunch, it is unlikely to, but how much will existing shareholders be diluted, I am unsure.

Furthermore with profits/revenue not growing as expected, I am quite sure current market capitalization is pricing it at a too optimistic price earning. I had estimated before that assuming 400 million ops profit, I would pay 90 times P/E for its growth for 25% annualized profit growth for about 5 years. This puts it at fair value of $28 per share.

[Wildreamz]

IMHO, PE is an incorrect metric to value Shopify, which is not optimized for net income yet. It printed a large net income in the last few quarters due to mark-to-market gains in their equity stakes in companies such as Affirm, Global-E etc. Even operating income is not optimized yet (operating margin 1%).

Edit: rough survey on websites, Shopify only diluted shareholders by 1% in the last 12 months.

[CY09]

Hi wildreamz, yes aware of it. Hence i stated 'Ops profits'.

Its like this year, it had to mark down 2 billion in fair value for investments. However, even stripping this line item, its operations is at a loss because it expanded its cost base for operations faster than the revenue.

I am not sure when would it achieve 400 mil in Ops profits, but i believe this can be achieved next year when all the retrenchment benefits are factored in.

In 2021, its ops profits was 268 million.