Author Topic: SHOP - Shopify  (Read 13226 times)

fuzzhead1506

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Re: SHOP- Shopify
« Reply #20 on: May 06, 2019, 09:54:25 AM »
Bumping this one.

I'll donate $100 to the human fund to anyone who can put forth a simple DCF suggesting a price at least 50% of where it currently trades.

How simple?   If you assume they grow subs/merchants to 3x what they have now (800,000 --> 2.4M) over the next 10 years and (on average) 2x the amount of revenue they extract from each of their customers that gets you to $7B in revenues.  As they move toward 35% operating margins that should support a 9x EV/Sales exit multiple.  If they continue to use equity to fund their growth instead of debt, they might double their outstanding share count... ?  That gets you to a $400 share price by 2030.  Discounted back to today is a 4% CAGR

Edit: clarification


...........how is this a DCF?

should I adjust my language to indicate that 105% of the valuation currently rests in the terminal value?  PV of cash flows in years 1-10 is negligible by comparison to what happens between year 10 and infinity.... if the cash flows between here and 2030 are negative/minuscule that doesn't matter if they are able to eventually be as profitable as the market is implying

I could need to go back to Valuation 101 if none of this actually makes sense, but I suppose it has made sense to me. 


fuzzhead1506

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Re: SHOP- Shopify
« Reply #21 on: May 06, 2019, 10:46:08 AM »
I have attached the screenshot of my Excel model .  Numbers are moderately different than what I did with my simple numbers a few posts back, but the range is pretty close....

Edit: language clarification
« Last Edit: May 06, 2019, 11:05:58 AM by fuzzhead1506 »

glorysk87

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Re: SHOP- Shopify
« Reply #22 on: May 06, 2019, 11:50:44 AM »
Holy generous terminal value assumptions.

You expect this company to grow at double the rate of the economy forever?

And even with those assumptions you only expect a low single digit annualized return out of the equity? Sounds like something you should run screaming from.
« Last Edit: May 06, 2019, 11:52:26 AM by glorysk87 »

fuzzhead1506

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Re: SHOP- Shopify
« Reply #23 on: May 06, 2019, 11:54:22 AM »
well...that is probably poor form, but i could instead discount at 5% and use a terminal growth of 3.25% to get the same multiple (which shouldn't be unreasonable if 10 year rates aren't much above 4% as the model assumes)....

fuzzhead1506

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Re: SHOP- Shopify
« Reply #24 on: May 06, 2019, 12:01:59 PM »
well...that is probably poor form, but i could instead discount at 5% and use a terminal growth of 3.25% to get the same multiple (which shouldn't be unreasonable if 10 year rates aren't much above 4% as the model assumes)....

Also, I am not trying to make the bull case.  I was just trying to make a simple model that would perhaps be able to justify the current price.  There are a lot of paths that this could instead take as well.  Maybe revenues grow faster than assumed and the interest rates return to a 6% ish rate... maybe margins improve faster than I assumed but at the risk of debt growth.  There are a lot of ways to skin the cat on what a 35x FCF multiple is really saying

mcliu

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Re: SHOP- Shopify
« Reply #25 on: May 06, 2019, 08:03:13 PM »
Just keep lowering that discount rate. Base it on 10 year risk-free rate and you can justify anything. :)

deadspace

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Re: SHOP- Shopify
« Reply #26 on: May 06, 2019, 09:03:48 PM »
Why not just take a step back from the DCF trees to look at the forest ?

Is a company that is on its way to become the effective digital landlord for a large proportion of the worlds  small and medium size digital businesses worth more than $40 billion ?  -- there's your answer

fuzzhead1506

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Re: SHOP- Shopify
« Reply #27 on: May 06, 2019, 10:38:22 PM »
Just keep lowering that discount rate. Base it on 10 year risk-free rate and you can justify anything. :)

This thread might not be the place, but it perhaps adds to the discussion so Iíll respond here. 

I donít think that SHOP is nearly on the same level of predictability in terms of cash flows as other companies and hence why I am not long given my model.  I dont know if SHOP ever gets to 35 % margins nor that they will hit the revenues suggested in my spreadsheet.  I am merely offering one way that someone could do an analysis that justifies the current price.  Maybe this stops someone from loosing their shirt as a short is really my hope by posting, lest they fall victim the same way that CRM shorts were burned 10 years ago. 

Do you suppose KO, KDP, or BF.B are properly valued here? I do... the list goes on....Efficient Market Theory and all that.  These are the most followed, no growth, steady-state companies, trading at cash flow ratios in the high 20s.  I imagine they are valued often to have the nearly the same discount as I applied above (5.5% discount and 3% terminal growth, maybe explicitly stated but likely implied) in many investorsí valuations because interest rates remain quite low.  Margins, revenues and the balance sheet drive most valuations and I believe I have provided a simple yet sufficient model for satisfying the request - it seems others disagree.  In which case, I am sorry for cluttering the thread.

I am appreciative of the quippy remarks and others that have made me understand that I need to double check my math/assumptions because it helps me to put my feelings in writing as well as improving my attention to detail. 8)

In my mind, a discount rate is only suggesting what returns will get an investor to the exit multiple implied by the valuation - sort of... reverse DCF type of thinking.  I still consider myself to be in the elementary school of valuation, so if you have constructive criticism on my thoughts Iíd appreciate some discussion (perhaps on another thread or via PM).

Liberty

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lucasnascimento

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Re: SHOP - Shopify
« Reply #29 on: September 11, 2019, 02:59:18 PM »
Honest question: why don't Shopify try to make their own accounting software to compete with Quickbooks? It seems to be a very high margin business, and it appears to be easy to cross-sell it to their platform's customers. Maybe I don`t really understand the moat around accounting software or how painful it can be to develop this kind of software. Does anybody have a clue?