Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: jeffmori7 on October 05, 2017, 06:45:03 AM

Title: SHOP - Shopify
Post by: jeffmori7 on October 05, 2017, 06:45:03 AM
I am surprise there is nothing on Shopify here. When everybody is looking at Amazon and how it is transforming the retail industry, and much more, there are probably other players benefitting from this transition to e-commerce.

Shopify is a good enabler, allowing anyone to build a platform to do e-commerce. Even Amazon are customers.

Like Amazon during a long time, or any other large tech "startup", we are talking about a company not yet profitable, but growing at a decent rate, and where it is obvious that the value will probably go up at a decent rate over time. But there are no easy ratio to price it with the usual suspect. They don't have a large debt, they are growing fast, they are quite dominant, and there is a strong tailwind in their sector.

Here is a little overview: https://www.fool.com/investing/2017/08/30/shopifys-draws-inspiration-from-amazon.aspx

And here is the last investor presentation: https://s2.q4cdn.com/024715446/files/doc_presentations/2017/09/Investor-Deck-Q2-2017-(1).pdf

What do you think?
Title: Re: SHOP- Shopify
Post by: Liberty on October 05, 2017, 07:15:19 AM
And here's the Andrew Left short report that made it tank in the past few days:

http://www.citronresearch.com/citron-exposes-the-dark-side-of-shopify/
Title: Re: SHOP- Shopify
Post by: KCLarkin on October 05, 2017, 08:09:07 AM
It's a very interesting business. As Amazon hollows out the retail industry, especially department stores, there are many niche brands that will need to find a new channel. In many cases, I think a direct-to-consumer model can be powerful if the brand is strong enough.

The alternative is selling on Amazon. But the issues with counterfeiting and brand dilution should discourage many brands from selling on Amazon.

It seems like SHOP is a winner. But obviously, it is hard to say how much is already priced into the stock. I'm tempted to take a speculative bet on this, just because I don't think Left is that bright.

Disclosure: I know some people who work at Shopify's Toronto office. They are smart people, so this may bias my opinion in favour of Shopify.
Title: Re: SHOP- Shopify
Post by: DooDiligence on October 05, 2017, 08:41:43 AM
I just browsed the sight for 5 minutes & didn't see any of the stuff he talked about.

The 50K vs 500K argument seems like BS (80/20 & all that.)

At 1st glance they appear to offer a nice set of tools for medium, small & micro sized operators.

Gerber's E-Myth, living & breathing if a shop operator is successful & puts their business up for sale (and really has supply chain, etc., to back it up - caveat emptor...)

Does look expensive & the market lopped over $1B off (maybe he can talk it down a bunch more?)

Might sharpen management on potential regulatory actions against any kind of whiffy DRM.

Then Left covers & goes long?
Title: Re: SHOP- Shopify
Post by: DCG on October 05, 2017, 01:33:58 PM
It's a good company, and I've looked at it as an investment before, but I generally don't invest in companies that are not profitable.


It seems like it should be easier for them to turn a profit. How much are they spending on things like marketing?
Title: Re: SHOP- Shopify
Post by: MikeTheCannon on October 05, 2017, 01:43:41 PM
I just browsed the sight for 5 minutes & didn't see any of the stuff he talked about.

Resignation letter: https://www.shopify.ca/blog/75848773-ready-to-become-a-full-time-entrepreneur-heres-how-to-quit-your-job

Affiliate Program: https://www.shopify.ca/affiliates

"Online store for someday millionaires": https://www.shopify.ca/facebook/millionaire

"2700 people become millionaires each day": https://www.facebook.com/shopify/posts/10153167684546881

Find products to sell: https://www.shopify.ca/oberlo

4 Tips to help you create a profitable affiliate blog post: https://www.shopify.com/partners/blog/creating-a-profitable-affiliate-blog-post


Title: Re: SHOP- Shopify
Post by: gjangal on October 05, 2017, 04:38:16 PM
if you believe in Amazon's or any other ecommerce platforms 3rd party seller story, SHOP is enabling them in a big way. Drop shipping, company stores etc. 500k across the world sounds like a low number for the core order processing platform they have
Title: Re: SHOP- Shopify
Post by: DooDiligence on October 05, 2017, 04:44:11 PM
I just browsed the sight for 5 minutes & didn't see any of the stuff he talked about.

Resignation letter: https://www.shopify.ca/blog/75848773-ready-to-become-a-full-time-entrepreneur-heres-how-to-quit-your-job

Affiliate Program: https://www.shopify.ca/affiliates

"Online store for someday millionaires": https://www.shopify.ca/facebook/millionaire

"2700 people become millionaires each day": https://www.facebook.com/shopify/posts/10153167684546881

Find products to sell: https://www.shopify.ca/oberlo

4 Tips to help you create a profitable affiliate blog post: https://www.shopify.com/partners/blog/creating-a-profitable-affiliate-blog-post

Thanks; so they promote DRM thru affiliates (with extremely aggressive & some may say dubious copy) in order to open more stores & get more affiliates & they train the affiliates to keep them on message.

When you say it like that it kinda does sound like Herbalife (all that & still not turning a profit, unlike Herbalife.)

Any evidence of channel stuffing?

Are e-commerce operators actually making money or are they just building pretty stores & selling them to naive buyers?
Title: Re: SHOP- Shopify
Post by: jeffmori7 on October 06, 2017, 04:52:05 PM
https://www.forbes.com/sites/parmyolson/2017/10/05/shopifys-customers-shoot-down-scam-claims/#184823e35732
Title: Re: SHOP- Shopify
Post by: Pelagic on October 09, 2017, 09:50:35 AM
Anyone taken a look at the Shopify Store Marketplace where store owners can sell their stores?

https://exchange.shopify.com/shops?category_ids=&sortBy=trending_value_high_to_low&total_revenue=50000%2C500000

I realize there are other sites available to market Shopify stores but some first impressions from Shopify's own store marketplace.

Most of the higher revenue stores appear to have been created to sell. Revenue has a distinct inverted V shape where a year ago it was almost nothing then it spikes up quickly and then falls off as the seller moves to "pursue other ventures". Very few stores for sale have multiple months of high earnings, there isn't the plateau in an earnings graph you'd see in more mature businesses. Since stores are mainly priced off total sales and traffic, there's an incentive to source a hot product, dump money into ads to drive traffic, sell large volumes at low cost (low margins) to inflate total sales, and then sell the store citing its potential revenue and repeat the process.

I'd be interested in seeing what % of Shopify's millionaires came through the stores they run versus through selling the stores themselves.
Title: Re: SHOP- Shopify
Post by: menlo on October 09, 2017, 10:36:09 AM
From a local VC:  http://tomtunguz.com/shopify-s-1/

Title: Re: SHOP- Shopify
Post by: flesh on October 09, 2017, 11:30:46 AM
I don't know much about the company but any large co that's reliant on aggressive copy for a large portion of it's revs/earnings I would be extra careful with. I was in the aggressive copy business 02-2014 and it's being scrutinized by govt authorities at increasing rates. Without aggressive copy obviously your response rates go down and often to the point where they are unsustainable. If this is the top of the funnel, the rest goes with it.

It's a difficult situation because if your competition is doing it and your not, you don't have the margins to compete on the marketing buys. Meanwhile, many of the customers resulting from aggressive marketing simply would not buy at all without it.

Naturally, governing authorities always go after the big fish first. Some of what's being proposed in terms of required disclosures to customers would totally eliminate most of your customers= go out of business.

I've seen many companies shut down in the last few years, some of them by the ftc. 
Title: Re: SHOP- Shopify
Post by: rishig on October 09, 2017, 12:07:18 PM
I don't know much about the company but any large co that's reliant on aggressive copy for a large portion of it's revs/earnings I would be extra careful with. I was in the aggressive copy business 02-2014 and it's being scrutinized by govt authorities at increasing rates. Without aggressive copy obviously your response rates go down and often to the point where they are unsustainable. If this is the top of the funnel, the rest goes with it.

It's a difficult situation because if your competition is doing it and your not, you don't have the margins to compete on the marketing buys. Meanwhile, many of the customers resulting from aggressive marketing simply would not buy at all without it.

Naturally, governing authorities always go after the big fish first. Some of what's being proposed in terms of required disclosures to customers would totally eliminate most of your customers= go out of business.

I've seen many companies shut down in the last few years, some of them by the ftc.

What does "aggressive copy" mean?
Title: Re: SHOP- Shopify
Post by: flesh on October 09, 2017, 12:20:35 PM
I don't know much about the company but any large co that's reliant on aggressive copy for a large portion of it's revs/earnings I would be extra careful with. I was in the aggressive copy business 02-2014 and it's being scrutinized by govt authorities at increasing rates. Without aggressive copy obviously your response rates go down and often to the point where they are unsustainable. If this is the top of the funnel, the rest goes with it.
 

It's a difficult situation because if your competition is doing it and your not, you don't have the margins to compete on the marketing buys. Meanwhile, many of the customers resulting from aggressive marketing simply would not buy at all without it.

Naturally, governing authorities always go after the big fish first. Some of what's being proposed in terms of required disclosures to customers would totally eliminate most of your customers= go out of business.

I've seen many companies shut down in the last few years, some of them by the ftc.

What does "aggressive copy" mean?

"Someday Millionaires" is a red flag, the state and feds despise anything approximating an earnings claim. Anything resembling an earnings claim will be more heavily scrutinized in the future. Disclosures will increase = fewer customers.

People want to be someday millionaires, they don't want to make the average of all past customers, which is very little. They want the dream, not the work. Using this microcosm as an example, if the headline was "1/10000 of our clients are millionaires and here's what they did differently, if you do these things too, you may have a chance of success greater than if you don't". That's the sort of thing that happens with increased scrutiny/disclosure. Plus you'd have an asterisk and the following lawyer speak at the bottom.

I'd bet money that the "someday" wasn't there as some point in the past.

Edit: Memory is being jogged by your question.

I'd add that another thing being cracked down on assisted marketing. The business opportunity act has been around for awhile, can't remember, maybe since 2010ish.... however it's only been the last few years that it's actually being enforced, which is what matters. Assisted marketing is a large part of the sales pitch/why customers buy and it may no longer exist in the future.

If you're selling a dreamer a website it's a much stronger pitch to say that you will build and market a web site for them vs providing the tools to do so, they want all the hand holding they can get. You can see this in just how easy everything is made to seem to potential customers. You don't need inventory, we'll provide merchant accounts (although you may not qualify, we'll leave that out). You don't need money because you can buy at xxx and have it drop shipped to x customer and make the difference. I guarantee that if shopify isn't up selling them atrocious amounts of stuff at huge mark ups, they are selling their customer lists to someone who will and taking a 30-50% cut. With the leads that are generated but never up sold, they will sell these lists as well.... however that market is being scrutinized as well. They are requiring that you the seller of your customer/lead lists qualify the marketing copy being used by the companies that will market it, reducing the size of this market.

Another thing that is recent, is the FTC is shutting down the lead gen guys and then perusing their client lists and sending them cease and desist orders.

Funnel goes, lead gen, sales floor, coaching/ products/ services/workshops, up sells of bigger and better stuff plus corp and accounting services. Every point in this funnel is being more scrutinized.

Unless you can disprove everything I've written in the case of shopify, I'd look elsewhere.

Geez, another edit. I'll add that many of these claimed "zero to 1.5m in a year" success stories..... the 1.5m is often revenue, which isn't mentioned. Often at tiny margins.

Also, I would want to know what they are charging for merchanting services. Because some of what's sold on the customer websites are high risk, this often means higher rates/per transaction charges. By grouping the bad with the good risk, they probably keep this down. Anyone who is doing mass sales and has a merchant history that is clean, would likely see a lower rate through traditional channels.
Title: Re: SHOP- Shopify
Post by: mrholty on October 09, 2017, 01:05:25 PM
In the past 18 months I have started to sell on Amazon and then on Shopify with 1 product and starting on a second.  Therefore I'm pretty familiar with the space.  I spent a lot of time figuring out what I wanted to do and I think Shopify has the best product and setup.  That said - the sites you see being sold are set up to be flipped and not indicative of the power of the marketplace.  I am aware of 2-3 shop owners that I have met that are doing $1M-$5M on sales on Shopify so there are real success stories. 

That said the churn is ridiculous.  What I've generally seen is someone follows the copy - tries to build a site.  Gets guidance to make it more professional, hires someone to clean it up.  They source products via Alibaba and not their own.  They push ads (via Instragram and Facebook) to their website.  They do this for $5/day in ads and after 3 months of trying the close their shop and don't tell anyone about it.  Or they are simply selling or stealing trademark shit (such as Disney or whatever).  Disney hits the website and Shopify with notice.  The guys are in Thailand or Philipines so they close it and then reopen 2 days later and just restart all over again.

When I first started this I realized how great Shopify was vs the competition and I bought a little bit ($43 USD) and sold when it doubled as I spent more time in the environment.  I went to unaffliated conference with some big sellers (who were all selling their add-ons) and I looked around it felt like a home flipping seminar but with multiple sellers/sharks.

There are winners and the tool(s) that Shopify has done to create the ecosystem is there but there is no way there are 500k websites.  Even 50k seems high to me.

 

Title: Re: SHOP- Shopify
Post by: jschembs on May 03, 2019, 10:06:16 PM
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.
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 on May 06, 2019, 08:20:13 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
Title: Re: SHOP- Shopify
Post by: blainehodder on May 06, 2019, 08:42:47 AM
I have an old friend who has worked in UX design there since they were absolutely a fairly small company.  The company is unquestionably the leader in enabling absolutely anyone to sell products online and market under their own brand instead of just listing as a 3rd party seller on Amazon. I can't believe how easy it is to sell things online these days. You don't even need to stock products. Simply market vapor and fill it with 3rd party orders once you have already sold. Truly incredible what this has done to working capital of retail.

The business economics are incredible, but the valuation seems absolutely off the charts. Is this market going to continue to grow at the pace we have been seeing?

I'm torn on the growth that is implied by the price doing a reverse DCF like Damadoran would do. I can't help but think the price is too high, yet the revenue growth continues at an absolute rocket ship pace. Are longs thinking that Spotify will eat a significant portion of Amazon and Ebay's 3p market share?

I am also wondering at what scale do people churn from Shopify and move onto their own cheaper custom solution. At what level of sales would you abandon Shop and hire a team to build a site with open source tools and payment processing instead? The rake that Shopify is currently charging seems quite extreme once you achieve over ~$1M in annual revenue.

On a side note, has anyone on this forum tried opening a store using Shopify? How is it doing? Just how hard is it to line up the supply chain?  I am thinking of getting into it for some niche guitar products that I can probably source through Chinese manufacturing.
Title: Re: SHOP- Shopify
Post by: Pelagic on May 06, 2019, 09:08:26 AM
I am also wondering at what scale do people churn from Shopify and move onto their own cheaper custom solution. At what level of sales would you abandon Shop and hire a team to build a site with open source tools and payment processing instead? The rake that Shopify is currently charging seems quite extreme once you achieve over ~$1M in annual revenue.

This SeekingAlpha article (https://seekingalpha.com/article/4259026-shopify-valuation-makes-sense) references a 77% churn rate. Although it attributes that mainly to new companies trying and failing something. I think from a client perspective with an established store on Shopify, yes a custom solution will probably save you money but if you're growing sales significantly you're likely more focused on allocating capital to marketing, product line, etc. than to spending a large chunk on a new site.

Additionally I think there's a healthy marketplace for buyers and sellers of Shopify stores so there's incentive for users who want to grow a store and sell it to use the platform rather than create a custom solution even if the price difference between the two is negligible. I suspect given Shopify's internal marketplace and its vetting tools there is likely a premium attributable to Shopify stores relative to a custom site with similar sales/margins.

Their internal marketplace itself is actually a pretty interesting glimpse into valuation, some crazy multiples there as well.



Title: Re: SHOP- Shopify
Post by: glorysk87 on May 06, 2019, 09:39:34 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?
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 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. 
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 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
Title: Re: SHOP- Shopify
Post by: glorysk87 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.
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 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)....
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 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
Title: Re: SHOP- Shopify
Post by: mcliu 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. :)
Title: Re: SHOP- Shopify
Post by: deadspace 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
Title: Re: SHOP- Shopify
Post by: fuzzhead1506 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).
Title: Re: SHOP - Shopify
Post by: Liberty on July 11, 2019, 08:04:30 AM
https://stratechery.com/2019/shopify-and-the-power-of-platforms/
Title: Re: SHOP - Shopify
Post by: lucasnascimento 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?
Title: Re: SHOP - Shopify
Post by: chesko182 on September 12, 2019, 03:28:47 PM
https://techcrunch.com/2019/09/09/shopify-buys-warehouse-automation-tech-developer-6-river-systems-for-450-million/

This is pretty relevant news, basically following the Amazon playbook back when they bought KIVA Systems a couple of years ago (now Amazon Robotics). 6river was founded by ex-Kivas and was considered one of the independent leaders in warehouse automation. Warehouses and FCs are pretty ripe for automation disruption and this makes perfect sense if they want to achieve scale and compete with Amazon. Amazon Robotics is the clear leader in warehouse automation by now and a big part of their moat around logistics. Typically these robots can achieve 2-3x productivity gains vs. manual labor.
Title: Re: SHOP - Shopify
Post by: Liberty on October 28, 2019, 07:23:42 AM
https://traviswiedower.com/2019/10/28/shopify-and-its-strong-competitive-advantages-continue-to-take-market-share/
Title: Re: SHOP - Shopify
Post by: Liberty on November 06, 2019, 08:00:21 AM
20-min interview of Tobi:

https://www.youtube.com/watch?v=gCac723JDXE
Title: Re: SHOP - Shopify
Post by: Liberty on November 08, 2019, 11:39:23 AM
Negative article about Shopify (for a change):

https://www.modernretail.co/platforms/almost-a-scam-as-dtc-brands-grow-shopify-is-struggling-to-keep-up/

h/t Marcelo P. Lima
Title: Re: SHOP - Shopify
Post by: Liberty on December 06, 2019, 12:43:04 PM
New interview with Tobi:

https://pca.st/olctiemg