SHOP - Post Shopaholic Season Earnings (DD will never be finished)

[Navi]

Hello Valhalla,

I’m back, and the next target only got bigger.

At the time of writing here is Shopify’s current chart since April 2021:

Now here is SHOP with the main focus being the last two earnings it just had:

The last two earnings for Shopify are rather surprising to me and how the stock has reflected what the market thinks about it at the current levels it is at.

Well lets start with the hedge funds:

The Biggest Hedge Funds Are Starting To Move Away From Formerly Hot Stocks

According to the author of this article here are the respective hedge funds and what they’ve been selling:

• Melvin Capital exited JD.com, PayPal, Uber and [color=yellow]Shopify[/color].
• Viking Global dumped Square, [color=yellow]Shopify[/color] and Alphabet.
• Baillie Gifford also reduced its positions in Alibaba, Amazon and [color=yellow]Shopify[/color].
• Coatue slashed its positions in Amazon, Square, PayPal, Tesla, [color=yellow]Shopify[/color], Peloton, Zillow and Facebook.
• Lone Pine sold some of its shares in Facebook, Amazon, [color=yellow]Shopify[/color] and Adobe Systems

Hmmmm odd you would think that with the secular tailwinds from Covid that you would want to hold onto a lot of these companies, no? Well if the hedge funds are selling/reducing exposure to a stock its probably because it’s just grown to be too large a portion of their portfolios and they need to thus reduce exposure as the equity causes the portfolio to be too heavily weighted for their risk tolerances. But that causes selling none the less.

So what do the analysts think?
Note: I get my analyst ratings from ETrade and so if you got another more objective source with better overall view of analysts ratings please feel free to throw it my way*

The general consensus for SHOP is an AVG price target of about $1,671 and that yields about a 6.22% upside to the stock at its current level. (Keep in mind the top graph is from averaging the the price targets of [color=red]19[/color] analysts so you shouldn’t take that as a super strong signal)

But the more interesting point for me is the recent amount of HOLD’s that SHOP has gotten recently. 4 in a row.
Seemed to start around 10/29 wonder why?

O… Yeah that might do it. For a company like SHOP who has been absolutely crushing earnings ever since COVID started to have a surprise miss of -0.36 is the miss and the analysts and market seemed to care… for like 30 minutes.

Now any sane person would look at that response to a ~30% EPS miss and think I’m absolutely bonkers for wanting to having a bearish stance (and that could be true as I write this or in the future as more news comes out; it’s just how I’m feeling right now tho). But this one slide on ER has now raised a very important question that impacts SHOP where it is at.

A small excerpt from a analyst update from BUY to HOLD sums it up pretty well:

Loop Capital analyst Anthony Chukumba downgraded Shopify’s stock to hold from buy Monday, writing that his rating change is “[color=red]based on Shopify’s valuation[/color], as opposed to a more bearish view of the company’s fundamentals.” He still sees Shopify as “well positioned for the secular shift to e-commerce” and is “impressed by the company’s laser focus on eliminating merchant pain points and continuous innovation.” At the same time, he argues that Shopify’s current valuation is “in line with our bullish outlook” given that shares are trading at 34.1 times his 2022 revenue estimates. “We would await a more attractive entry point before becoming more constructive on the stock again-and given the high volatility in the stock price…we may not have to wait very long,” Chukumba wrote, while keeping a $1,600 price target on the stock. Shopify shares are up 47% so far this year as the S&P 500 has risen 25%.
Source: https://content.seleritycorp.com/hosted2/assets/www/tfqpaDFcFya74pI4UoikVrx3T7fPMp3uVZz790--Yqk

So the valuation talk that’s not a very scary prospect right?

Source: 10-Year Treasury Bond Yield: What It Is and Why It Matters

And I know I know. You’re sitting here thinking, “Fucking Navi gets one thing right and now he’s lecturing me on fucking bond yields.”
So, lets look at a few charts (no names just yet! Just charts!)

Now for your own awareness the stocks above are FB, AAPL, NFLX, and GOOG during the 2018-2019 year.
Here is where 10 Year Treasury Yields were:

Source: https://www.google.com/finance/quote/TNX:INDEXCBOE?sa=X&ved=2ahUKEwiH16ObsLD0AhXhN30KHautA8YQ3ecFegQILBAc&window=5Y
So at the beginning of 2018 you were basically able to get a 26% return on your money for a 10-year bond (I know that sounds fucking horrendous but they’re safe so I guess there is that).
But more importantly that money was essentially risk free (I know we’d all love to argue about how the Gov fucks around with the debt ceiling and fucks our SPY FD’s but just buy puts next time fam and weather the storm). Risk free money means a lot and whether or not you want to appreciate it, investment firms have to balance their risk so that you can retire within your retirement plans timeline (unless you’re Fash and yolo you’re Roth in ESSC) and not have to worry about whether you’re going to be one of those clerks at Aldi’s when you’re 75 as 18 year olds chuck liters of root beer down the aisles.
When we see the bond yield prices moving up we’re going to start seeing some bigger P/E ratio stocks start to lose some of the steam that they’ve been having. Everyone’s making money and of course retail will still have a larger part to play in this market moving forward but the underlying factors are still at play and its up to us to learn how to play with them.

Now back to Shopify lets talk about the good (cause they got a lot of it):

This is a slide from Shopify’s annual shareholders meeting

Interestingly during this meeting a shareholder did ask about a stock split, the CFO said no, but however they do monitor the capital markets (so it was not a heavy no).

So it goes without saying that SHOP had a pretty killer 2020 fiscal year. I mean nothing on this slide would ever tell me that their upcoming ER in Febuary would be one to possibly be looking for some downwards movement. If anything I look at this as most investors would and see nothing but growth, scalability, huge partnerships, and a lot of of $$$ coming in from Covid tailwinds.

Now what does SHOP have coming down the pipeline?
Well if you want to check it out here’s their Unite 2021 video

Shopify Unite 2021 | Coding commerce. Together.

One of their big announcements was “The Online Store 2.0”
It focuses on 3 themes:

Most of these updates allow for merchants to manage their online store with some new features like templates and sections, allow for easier page reproduction for new products quickly, and some developer tools. In wrap up it allows for some better management and ease of use for shopify developers. Overall this may reduce the barrier to entry (from a technical perspective) but I’m no confident that will translate to increasing customer acquisition for SHOP.

Oh god… So for reference for people who don’t know me or what I do for a living. I work as a Cybersecurity Compliance Engineer. I do SOC, PCI, ISO, and international regulatory gap assessments to name a few of my duties. But before that I worked as a Bug Bounty Engineer. Bug Bounty is essentially a team that receives vulnerabilities from security researchers (their just good hackers really) on your websites essentially.
SHOP announced that everyone had access to a new feature;
DAWN: basically open sourced GitHub repo for SHOP developers.
Which involves using HTML, CSS, and progressive Java Script.
This will undoubtedly cause some issues, not just within the possible vulnerabilites that could plague SHOP websites/developers but also on the internal management of how SHOP manages this GitHub Repo… Which they already fucked up lol. This could definitely lead to some regulatory fines if bad actors decide to target SHOP.

This is from their Bug Bounty program with HackerOne and this researcher was awarded their highest payout (being $50,000) and yeah its really fucking bad.
I’m sure the devs/IT people we have in here are laughing and thinking about their own misgivings.

Shop also announced that their investing in their Shopify GraphQL engine by by bringing their GraphQL engine to be within <50ms of every buyer ON EVERY CONTINENT. This is pretty big, I’m not sure on overall cost this will incur but again adding to better customer experience is always a nice sign to see.

Another big announcement was that they will be allowing merchants to recieve payouts in different currencies (200 regions and many currencies) including…

They also announced they will not be collecting revenue on Shopify apps for the first $1M of revenue earned by Shopify app developers. (This occurs every year for all apps)

Their biggest announcement is undoubtedly:
Hydrogen
To check out a little bit of what its capable of just watch this little snippet of their UNITE 2021 video:

Shopify Unite 2021 | Coding commerce. Together.

That is really cool hahahha I’m super impressed honestly.

I won’t go into the specifics but heres their documentation on Hydrogen:

Getting started with Hydrogen and Oxygen

Notes:
Etrade Analyst: https://www.etrade.wallst.com/v1/stocks/research/research.asp?ChallengeUrl=https://idp.etrade.com/idp/SSO.saml2&reinitiate-handshake=0&AuthnContext=authenticated&env=PRD&symbol=SHOP

Etrade Earnings: https://www.etrade.wallst.com/v1/stocks/earnings/earnings.asp?view=revenue

Open Store idea (buying Shopify merchants): OpenStore Raises $75 Million To Acquire More Shopify Sellers, Reaches $750 Million Valuation In Eight Months

Loop Analyst Hold (based on Shop’s valuation): https://content.seleritycorp.com/hosted2/assets/www/tfqpaDFcFya74pI4UoikVrx3T7fPMp3uVZz790--Yqk

SHOP 3rd Qtr results: Shopify’s Third-Quarter Results Eclipsed by Fourth-Quarter Fears - Bloomberg

SHOP ER chart: Shopify (SHOP) Earnings Date and Reports 2024

[Trogdor1]

hey @Navi I’ll give you a quick info dump from my perspective as someone who works for BIGC; one of their competitors.

SHOP is the king for startups and small businesses. With all of their built in features that you can plug and play it makes it easy to setup and start selling. In their annual shareholders meeting you can see they highlight the 700,000 merchants that joined the platform. This makes up a ton of their revenue because these merchants use the built in solutions like ShopPay that Shopify owns and maintains. I’m not sure how the app pricing change you called out will affect both their customer acquisition and revenue numbers

However; this business model isn’t extremely attractive to Enterprise level clients. Enterprise is defined by SHOP as Shopify Plus merchants and they are a $2000MRR customer or higher. In a year where 700,000 merchants chose Shopify only 3000 of them were at the enterprise level. The reason is because of the above strategy of built in solutions don’t provide the flexibility that these businesses typically require. These apps are also generally speaking more expensive in the long run for Enterprise Merchants (less favorable Credit Card rates than say BrainTree for example).

BigCommerce is the exact opposite where the open platform and partner focus allows big business to pick and choose different solutions that works best for them and as long as they can use our API’s (or build them out custom) they can choose whatever they want (That goes for payments, shipping, marketing etc). We make a lot of revenue from our partnerships

This strategy benefits Large Enterprise to the detriment of smaller merchants due to the perceived complexity of setting up a BigCommerce store as well as perceived increased costs from the partner apps (whether or not this is actually true is irrelevant but that’s the perception)

The Hydrogen project you showed is a perfect example of the two philosophies. Shop would have additional functionality and may or may not charge for it and BigCommerce would say hey have you checked out our partner Spiff and get revenue from the partnership.

Both companies are competing for Magento’s Enterprise customers because on-prem solutions for the most part are no longer a viable solution and especially not in the ecommerce space. Updating your site quickly is mandatory and the ecom space is only growing. Brent Bellm the CEO of BigCommerce says 2020 sprung forward the ecom space at least 5 years in terms of spending and merchants selling.

I’ll wait for your finished DD to talk around Holiday sales as a whole but I hope this was helpful in some of the strengths and weaknesses around Shop as well as BigCommerce

[lync]

@Navi u forgot to mention another product they are launching along with Hydrogen, which is Oxygen, their hosting solution for hydrogen (think netlify, aws amplify, heroku).

As a developer in the commerce space, I think Shopify’s platform is the clear leader in the fast growing “Headless Commerce” concept. With hydrogen, oxygen and their robust storefront APIs I think they will only continue grow their advantage.

I do agree with @Trogdor1 that Shopify isn’t as attractive to big enterprise level clients yet but as they continue to dive deeper into headless commerce, I definitely see them opening their platform up so people can choose which pieces they prefer to use and can use other 3rd party services in lieu of shopify products if they want.

On a side note: @Trogdor1 I’m not sure if you were comparing hydrogen with Spiff but they seem like completely different products. Hydrogen is a new react framework that completely removes shopify as the storefront. Meaning customers will have endless possibilities on how to build their website.

[Navi]

I was waiting on a dev to comment on Oxygen (thought it was in there) thank you for the insight

[lync]

Undoubtedly Oxygen is a part of their efforts to building/improving their global network infrastructure. So that goes inline with your bit on them improving the graphql performance as well as I’m sure its a joint effort. I believe they are starting with over 100 server locations worldwide for oxygen

[Navi]

Yeah they said they wanted to have a <5ms response time no matter what continent you’re on

[lync]

Do you have any positions yet? If not what are you watching

[Navi]

No and I’m kicking myself. So much money not captured in puts

[Trogdor1]

Good callouts! I think when I saw the Hydrogen product example they were showing a 3d rendering as a concept of what you can do which is why I showed Spiff, but if they are removing Shopify as the storefront that’s a really interesting development. I think Shop will continue to try to be as much of an all in one solution as they can be and for a lot of merchants thats what they want. Headless I think will be the biggest ecom change for those already in the space but so many companies aren’t even there yet especially in the B2B segment. BIGC is going to treat headless just like any other channel which will keep the flexibility in choosing your own solutions.

Also @Navi I saw you had seen some Holiday numbers but here are BIGC’s for your reference: 10% YOY (which isn’t that bad considering spend was down 1.5% as a whole) and BigCommerce merchants’ Cyber Week sales increased +103% from 2019 to 2021. I don’t think either BIGC or SHOP will have really surprising blowout Q4 earnings. Source

[lync]

I think headless will take over commerce in the future, so considering that its still in its infancy and many companies aren’t there yet and Shopify is already laying the foundation for it and investing heavily into building out their headless infrastructure has me pretty bullish on them long term. As for what that means for this earnings play IDK though.

I think Shop will continue to try to be as much of an all in one solution as they can be and for a lot of merchants thats what they want.

I think this is a coin flip. Its probably true that most of their revenue comes from keeping people in their platform but as headless commerce continues to grow they will have to adapt. Maybe in the future more of their revenue will come from their headless commerce platform and global infrastructure and they start taking market space from heroku, aws, and netlify while still giving businesses the flexibility in using other solutions for features they dont like from shopify. I could see in the future businesses using their platform solely has a seamless solution for their inventory management + storefront hosting and then using 3rd party solutions for fulfillment, payment processing, etc

[Trogdor1]

I agree on the headless front and the space as a whole is trying to position themselves to meet that need. I think what will be the biggest game changer in the near term is if any company can create a reason for merchants to pull all orders from all channels into their platform. In my experience the site that people have only makes up a small portion of their online business. BIGC acquired Feednomics and keeps announcing partnerships with markets to help with this effort but AMZN is the one they need. Why pay BIGC or SHOP more to pull through orders you already get? Whoever solves that question with anything more than “you can use us as your source of truth!” Will benefit the most.

Overall I am bullish long-term for both companies simply because ECOM as a space continues to grow YOY.

[brummel]

Thanks for the DD Navi, didn’t see this play sooner on the forum for some reason.

Will look for an entry on a bounce.

[Navi]

Yo I fucked up and didn’t respond to you but great insight. Appreciate it immensely.

[Navi]

This was the main catalyst for the earnings, and also what stemmed the ER play for ZM. We thought ZM was losing market share and not sustaining their growth and revenue growth expectations that wall street was looking for. I don’t by any means think that SHOP is declining in market share (as they grew Black Friday revenues by ~20%) but I do think they might not show the revenue growth that wall street is hoping for this ER since it is supposed to be their big one where they make a bulk of their revenue.

[Navi]

Great news for SHOP yesterday with this JD partnership. 550 million customers now available to SHOP merchants and a quicker entry time (3-4 weeks instead of the typical year).

[Navi]

Found this article and it succinctly puts together why I’m neutral on SHOP actually. Damn good read comparing SHOP to AMZN and Walmart. Here’s the main important snippet but its all worthwhile reading heading into ER.

Financials

Since we’ve been talking about SHOP’s financials, we can now turn to a deeper dive on that topic. We’ve already explored the company’s GMV and revenue, and how one relates to the other. Now it’s time to look at the picture as a whole.

In its most recent quarter, SHOP delivered:

• $1.123 billion in revenue, up 46%.
• $41 billion in GMV, up 35%.
• $616 million in adjusted gross profit, up 49%.
• Operating loss of $-4.1 million, down from a $50 million profit.
• $140 million in adjusted operating income, up 7.6%.
• $0.81 in diluted EPS, down 27%.

As you can see, the company’s revenue and gross profit grew by considerable amounts. However, some profit metrics declined, including the bottom line, and GAAP operating income was negative. One standout metric from the report was $9 in GAAP EPS, which was way above analyst estimates. However, that was almost entirely due to gains on the company’s massive stock portfolio. Since growth stocks have been selling off in 2021 and early 2022, we’d expect that same factor to have a negative impact in the upcoming Q4 release. For example, Shopify owns stock in Global-e Online (GLBE), and that stock fell 22% in the third quarter. That will be reported as a mark-to-market loss.

Shopify, going by GMV, is already an eCommerce “giant.” Amazon’s $110 billion in Q3 sales works out to $440 billion on an annual basis. Marketplace Pulse writes that Amazon had $490 billion in GMV in 2020. Walmart (WMT), for whom sales and GMV aren’t substantially different, had $559 billion in sales in its most recent fiscal year.

SHOP’s $41 billion in fourth quarter GMV is already rapidly catching up with these figures. $41 billion in a quarter is equivalent to $164 billion in a year. Grow that at 35% a year, and you catch up with Walmart’s 2020 GMV in just four years! That sounds like a good thing, but remember:

SHOP’s staggering amounts of GMV lead to much less revenue than Walmart or Amazon bring in. In the third quarter, sales were about 2.7% of GMV. If Shopify’s business model remains unchanged, then we should expect that figure to be consistent. So, how many sales does Shopify need to power to get to Amazon’s revenue when it was valued at $140 billion?

$2.7 trillion.

And how much to get to Walmart’s 2020 revenue level?

My friends, you’re going to want to take a seat. Perhaps even put on some calming music. Because in order for Shopify to reach $559 billion in revenue with sales at 2.7% of GMV, we’re talking $20 trillion in sales powered by the Shopify ecosystem!

To put that in perspective, the entirety of Alibaba’s (BABA) massive eCommerce network powered $1.2 trillion in GMV in fiscal 2021.

Of course, not every SHOP bull is expecting the stock to become an Amazon or Walmart tier giant. Perhaps, some investors would be content with 10% CAGR from this point on. But much of the buzz surrounding the company does come down to “next Amazon” hype. And remember: even to get to Amazon’s 2013 revenue level, Shopify will need $2.7 trillion in GMV.

Source: Shopify Really Needs A+ Execution (NYSE:SHOP) | Seeking Alpha

[Navi]

Interesting take on SHOP’s current valuation utilizing past cash flows, a type of buy out (if a company were to purchase them) exit valuation, and growth in perpetuity calculation (I fucking hate math like this so I’m not verifying it.)

What Does Shopify’s Current Valuation Imply

At 20x EV/Sales multiple, Shopify is trading at a market cap of $110 billion, down close to 50% from its peak valuation of $210 billion.

Analysts typically arrive at an “intrinsic” valuation of a company by discounting future cash flows plus a “buy-out” terminal value calculated based on either a multiple or a perpetual growth rate.

In this exercise, we work backwards. Instead of discounting future cash flows based on assumptions, we have taken the company’s current valuation to derive a market-implied terminal value multiple and a market-implied perpetual growth rate.

author’s model based on financial statements reported

This “backward” approach suggests that Shopify is only trading at a terminal EBITDA multiple of 10x and a perpetual growth rate of 8.25%. We think both market-derived valuation metrics massively underestimate Shopify’s growth potentials. Shopify has historically generated consistent, robust topline growth year-over-year. More specifically, Shopify’s revenues have grown by 111%, 108%, 95%, 90%, 73%, 60%, 47%, 86%, for each year between 2013 and 2020. Given that Shopify has historically generated, on average, 83% year-over-year revenue growth for the past eight years, we think the current market-implied perpetual growth rate of 8% has significantly underestimated the company’s future growth potentials.

Source: https://seekingalpha.com/article/4481045-shopify-tiger-cub-lone-pine-selling-stock-buy

[Kevin]

With PYPL’s earnings outcome today, are you shifting from neutral to bearish?

[Conqueror]

Lmao, still not finished. I took a SHOP put just now, looking to capitalize on the run into earnings which I’m betting will trend bearish. This position is a massive risk and I will cut it quickly if it doesn’t go my way, these options are also extremely expensive so keep that in mind.

[Conqueror]

For clarification, this play is attempting to profit on our earnings strategy of taking a position before, profiting on sentiment direction and IV increase and then taking profit before earnings. This step is with the intention of cutting before earnings.