S2E21 – Shopify Stock Review

[00:00:00.250] – Sean

In this video, I’m going to review Shopify. So for those of you who are an investor in Shopify, stock is down. I know this is a little nerve wracking, but hopefully this video will give you a little peace of mind on what’s going to be happening with the stock and then your future. So we’re going to do a 4Ms analysis. We’ll start with Tykr to look at the margin of safety.  

[00:00:19.950] – Sean

That’s the math part of investing. Then we’ll jump over to the Moats and management. Let’s dive in.  

[00:00:30.270] – Sean

All right, when you go to Shopify, within Tykr, you can see the stock is on sale. That’s a great sign. We see a score of ten out of 20 and then a margin of safety of 80%. Share price is 385 and sTykr price or fair value is about $1,900. So good signs there.  

[00:00:48.480] – Sean

The financials we would like to see a little higher. Of course, the ten out of 20 is the bare minimum on sale and Tykr is a tenant or higher and a 50% margin of safety or higher. So we’re just meeting the minimum. But let’s take a closer look at the financials and really see what’s going on here. So when we get to the annual statements, we’re going to take a look at the income statement, cash flow statement and balance sheet real quick.  

[00:01:14.750] – Sean

You don’t have to do this, but we do present this data if you’re interested. Unfortunately, Tykr does the hard work for us and rolls it up into that score and that margin of safety. So looking at the revenue year over year looks fantastic. Really nice increase year over year, just really impressive. What’s even more impressive is the net income and the EPS, which are pretty similar metrics.  

[00:01:39.130] – Sean

So EPS is the net income divided by outstanding shares. That’s the most important metric that investors and institutions look at with businesses. But either way, you can see a year ago the net income was about 319,000,000, while it jumped up to 2.9 billion. That’s a great sign there. So, of course, with the EPS, we see that nice bump as well.  

[00:02:04.530] – Sean

Now, if we go down to the cash flow statement, we can see the free cash has increased nicely over the last two years. And then the balance sheet, we can see it’s like picture perfect textbook assets just increasing year over year. Same thing with your equity. The liabilities and debts are increasing. We ideally like to see those two data points decreasing and we’ll get into that in a little bit.  

[00:02:30.300] – Sean

This is related to some acquisitions and a more recent acquisition that was quite expensive, but it should work out in the end. The issue with the stock, the financials at least, is when you flip it to the quarterly here, you can see the revenue is a little flat. Net income has declined and of course, your EPS has declined. So Tykr, what we do is we look at about five years, approximately five years. We try to go that far.  

[00:02:57.610] – Sean

Some stocks won’t have that much data available. So we like to go at least three quarters. But we look at the quarterly statements and then we run the math that way. Again, we do it all for you, but I’m just giving you a little context here and this works. So in this case, this is why the stock score isn’t a little higher.  

[00:03:14.650] – Sean

This is part of the reason is the net income. And EPS, they’re kind of falling back. We want to pay close attention to this. We’ll talk about this later in the video. Let’s do the same here with the free cash flow.  

[00:03:30.660] – Sean

We’ll go quarterly, looks really good a quarter ago, but the most recent quarter, you can see we’ve gone back into the negative again. So another point to pay attention to again, this is why that score is in a little higher. And let’s do the same here with the balance sheet. So looking at assets, if we just go back in time a little bit, increase, quarter over quarter has been a little flat the last few quarters, maybe a slight decline, which is okay. Liabilities little increase as well, but it’s pretty much level.  

[00:04:06.510] – Sean

Debt is level and then equity is level as well. So the balance sheet is actually pretty good. The risk from the financial standpoint is the income statement and cash flow statement. So overall with the financials, I think we can check that box looking pretty good. We do want to see a little bit higher score as this stock goes, the next few earnings reports, but overall looking pretty good.  

[00:04:28.610] – Sean

So let’s jump over to the meaning of the business. This is where I spend a lot of time, is what does the business do? How do they make money? How does this business look over the next ten years or so? What I’ll do is I’m going to reference a few new sources here in a second.  

[00:04:46.470] – Sean

But starting with the first question is how does Shopify make money? So Shopify first launched as a straight SaaS platform and then it introduced soon after the transaction fee model. So I’m a big fan of Sass of the reoccurring revenue, whether it’s month over month or year over year, both on the B to C, which in this case Shopify is business to business, B to B. But 20% of revenues from subscriptions, that SAS model, and 72% is from the transactions. And that can include some products here, including you’ve got Shopify Pay, which is kind of like its own payment processor, like a PayPal or Square.  

[00:05:28.230] – Sean

You’ve got or I should say Stripe. Then you’ve got currency conversion, shipping. There’s a point of sale hardware product that is competitive to Square. And then they have Shopify capital. So it’s kind of like a bank.  

[00:05:42.410] – Sean

You can borrow funds from the business. Of course there’s an interest rate. You’re going to pay like any bank, great business model. So I’m really happy to see that within Shopify. And then you can customize features, I think for additional price as well.  

[00:05:56.300] – Sean

But that’s 72% of revenue is from the actual transaction fees, not the SAS. That tells you something about the business model of creating a transaction fee model. I’m a big fan of this. I like SAS a lot to business models. I consider superior would be your transaction fee model and then of course, advertising the model you see with Google or Facebook.  

[00:06:21.550] – Sean

So let’s jump into the news a little bit. So for those of you who do hold the stock or you’re waiting on the sidelines to get into the stock, we have some pretty exciting news with Shopify. So first off, this relates to the higher liabilities and debt. So Shopify has been known to make a few acquisitions over the years. What I like to do is kind of write in these articles.  

[00:06:44.290] – Sean

You can go to Tykr.com and go to our stock reviews and see this full article. But I like to give a little context on the history of the business and they have acquired a lot of businesses. This is a smart play because typically in big business, you will see a buy before build model or there’s a philosophy within. I’ve worked for some organizations that use this is you should be buying other businesses instead of building your own. It’s much faster to go to markets.  

[00:07:12.690] – Sean

It’s a lot less risk, there’s a lot less bugs. And when you have competition, you want to get there first. So buy before build is hot. They do that. In this case, they’re buying what looks like it’s a company called Deliver for 2.1 billion in cash and stock.  

[00:07:30.430] – Sean

What this software does is it helps with like predictive analytics, smart model. Anything that I’ll tell you right now, anything I see that’s around logistics or supply chain, pretty boring industries, but there’s a lot of room for improvement. So I think that’s a great place to be for Shopify acquiring this business. 2.1 billion, though, that’s a little bit of a hit to the debt there as well as the liabilities. So you’re going to bring in a lot more payroll, a lot more employees.  

[00:07:59.230] – Sean

So, nature of the business when you’re acquiring another company, one thing to keep in mind is with a software business, you’re not going to see a lot of like high overhead with of course, like manufacturing equipment or materials because it’s software. But this will get you thinking about some of the businesses that you invest in that have like a physical product, like an auto manufacturer like Tesla. You’ve got a lot of metals and plastics and aluminums. Those come at a cost. And how do you get those products to your manufacturing plants?  

[00:08:31.800] – Sean

There’s supply chain, there’s a lot of overhead with those types of models. Software, of course, I love because you don’t have those elements to the business. Anyway, moving on, another article here from Seeking Alpha. This was a really fun title which I can agree with. This is a broken stock, not a broken company.  

[00:08:50.630] – Sean

The stock is down 80% from its all time high. But as the business really become that weak, the answer is absolutely not. And they do speak to that because as we saw with the financials that year over year revenue continues to increase. It’s really a solid business model. They’re doing a great job.  

[00:09:08.700] – Sean

There something else fun here from Motley Fool talked about buy with prime is a new feature that Amazon is introducing where other ecommerce platforms outside of the Amazon network can use this to buy products you can buy with prime right there on that site. Now there’s a little bit of risk. Some analysts were talking about, hey, this is a risk to Shopify, amazon is going to take business away. Well what the CEO of Shopify said, Toby Lootkey, he mentioned they’re going to introduce the Buy with prime on Shopify site. So your says here the requirement is you need to be an Amazon FBA seller fulfillment by Amazon.  

[00:09:51.210] – Sean

If you are that classification, you can add that by with prime right there on your platform. In my opinion, I think this is a great opportunity. You’re working with a bigger business, not against them. I’m a big fan of that and in this case I think both Amazon and Shopify are going to see an increase in revenue, increase in traffic. I think that’s a great play there and I do agree with Tobias saying this is a win.  

[00:10:15.680] – Sean

This is something we’re excited to introduce.  

[00:10:20.430] – Sean

All right, this is the big news. So as of the recording of this video, it is June 28. Shopify will introduce a ten to one stock split on June 29. So by the time this video is live on YouTube, that split will already have occurred. The stock of course, and the whole market is really down right now.  

[00:10:39.130] – Sean

So it’s not like the stock is going to take off right away. So don’t feel like you’re missing out on any opportunity here. But stock splits are really hot, especially for b to b business. But when you look back at history, I think Microsoft conducted nine stock splits since the then Apple I think it was five or six. And with each of those, because they’re well known brands, you typically see a lot more activity from retail investors.  

[00:11:07.510] – Sean

So stocks, but of course it’s not going to in this case make us ten times richer with a stock. What it does is it cuts that share price down and just makes it a lower barrier to entry. It’s a lot easier for people to get into. You think like the Amazon and the Google’s of the world, pretty expensive stocks from a share price standpoint when you’re paying over $1,000 for one share, your motivation to get into it is a lot less, especially for a lot of new investors. What we have here, if the share price is three, I think what did I say, it’s 385.  

[00:11:42.440] – Sean

So essentially it’s going to be $38.50 is what we’re looking at, which is amazing opportunities. So if you’re going to do a stock split, you want to do the split during a down market. It’s the one two punch. You give the opportunity for a lot of people to get into this stock, and when the market rallies and turns around, stocks like this can really take off like a rocket, especially if those quarterly reports are exceeding expectations. I’ll touch on that in a little bit, but that’s what we’re looking for.  

[00:12:13.580] – Sean

I’ll give you, like, my play by play what I would do here. But with the stock split, I think that’s amazing news. So something to keep in mind here. Again, video is probably going to be live after this split has occurred. Next up here, this was really fun.  

[00:12:29.060] – Sean

So CNBC was talking about how ecommerce sales has declined about 1.8% from a year ago. And there’s a lot of people getting worried like, oh my gosh, all these people are going to flood the retail market. We’re going back to stores. Brick and mortar is going to be a thing again. No.  

[00:12:47.250] – Sean

Okay, so the horse and buggy is going to be a thing again. And we’re going back to using coal. I’m just kidding. But in this case, yeah, shopify has taken a hit. So Shopify etsy wayfare, there’s a few other businesses that are in the ecommerce space.  

[00:13:02.940] – Sean

Sure, they’ve taken a hit in this case, but ecommerce is always going to be the play. So to give you some examples here, I have some friends that work in the retail space, and they’re talking about how customers will actually walk into stores if they do go to a physical store. And they’re checking out the prices of whether it’s electronics or hardware or clothing. And they’re doing their shopping in person, but their price shopping on their phone. And in many cases, they’re making the purchase right there on their phone from another company.  

[00:13:36.150] – Sean

This shows you that ecommerce, this is not going away. So if you ever feared that, wow, okay, shopify, I’m really afraid here. I want to sell it’s down. I don’t think it’s going to recover in that regard. E commerce, it’s not going away.  

[00:13:51.770] – Sean

Trust me in this case. So, yes, it’s a little scary with the stock being down 80%, but there’s a lot of stocks down at that level. PayPal, and my portfolio is one of those. But in this case, I think you’re going to be okay with ecommerce in the future. One more comment I want to make here with investors.  

[00:14:10.850] – Sean

Placed list seven hot stocks to start buying right now. Top of the list, shopify. This list also includes roku, Alibaba, Upstarts, twilio, Disney and Adobe. So overall, the news really positive. On the stock where ecommerce is going, hold strong.  

[00:14:30.770] – Sean

If you’re an investor, we’re going to keep going here. But up until this point, you’ve got the margin of safety. You got the meaning. Both look great. Let’s move on to the most third M.  

[00:14:41.670] – Sean

So Amazon we can look at as a competitor. Sure, you can sell products on there, can pull some customers away, but I really like the fact that Amazon and Shopify, they can work together a little bit. So that’s great. It’s better to work with your competitors than against them. A few other sites I want to list.  

[00:14:57.540] – Sean

You’ve got Wix, which is Public, a website builder. They do have an Ecommerce bolt on, but they do not have big brands. Kind of like what Shopify does. And we’ll touch on that in a second. You’ve got BigCommerce is another site.  

[00:15:12.140] – Sean

Now, two other sites that or platforms I’ll talk about, you’ve got Salesforce, which sure, there’s maybe mid sized businesses, but there are large businesses that will use it for ecommerce. Great product there. And then you’ve got Adobe. So I’ve got some experience with AEM. It’s called Adobe Experience Manager.  

[00:15:33.670] – Sean

And that product, that’s not for small or mid sized businesses. That’s for big businesses. That’s what they use to build their sites. The sTykr price on using that product for like a large brand with thousands of SKUs can be just for using a platform. It can be hundreds of thousands of dollars on up to millions of dollars a year just for the SAS.  

[00:15:53.340] – Sean

That’s the SAS price. So whole other level, Shopify’s Enterprise Play does compete with that a little bit. I would have to really get in and see the bells and whistles, but I don’t think it’s going to be as robust as AEM. But it’s still a really solid product. Shopify, we’re going to jump to the pricing here.  

[00:16:15.450] – Sean

They’ve got Basic, you’ve got your Shopify mid ground. Basic is 29. Shopify is 79. And then you got your Advanced, which is 299. Pretty easy prices to get into.  

[00:16:26.270] – Sean

Of course, the bigger your business and let’s touch on some of those right now, the more you’re going to pay. And then of course, there’s a transaction fees. That’s where Shopify is making the majority of its money is off those fees. So going back up just to list some of the customers that are on Shopify, this includes some impressive brands on the list. So Netflix has a shopping cart of some sort where you can buy physical products, but then you’ve got Penguin Books, Staples, Gym, Shark, La Lakers, Fitbit and more.  

[00:16:58.530] – Sean

The larger your business is, in other words, the more SKUs, you have more products. That means more configurations. In this case, trying to sell to move to another shopping cart is really hard to do. And that’s what makes shopping cart sites really sticky. A lot of big businesses are going to commit to an e commerce platform.  

[00:17:21.290] – Sean

They’re going to try It For A Week Or A Month, which You See With A Lot Of These Small Business Owners. They’ll Try This Ecommerce Platform For A Month Or Two. Then They’ll Switch To This. Well, They Don’t Have The Numbers SKUs. They Don’t Have Everything Set Up In This Case.  

[00:17:34.460] – Sean

So Shopify Or Any Other Large Shopping Carts, they’re Going To Be A Little Stickier. There’s Another Company I Do Want To Address. This Is Ducan. Ducan Is Based Out Of India. You Can See The Pricing Starts At About $10 A Month, then Up To $50.  

[00:17:49.610] – Sean

So A Lot Cheaper Than Shopify. Now, What It Sounds Like You Can Build A Site they Claim You Can Build An Ecommerce Site in 30 Seconds Or Less Or Something Like That. That’s Great. This Is Going To Be Great For That Small Business Market. A Lot Of Ecommerce People Out There Who it’s Just Them.  

[00:18:06.920] – Sean

Maybe They Have Got One, Two, Five, Maybe Ten Employees. They’re Going To Go With This. And Sure, They Can Take Some Of That SAS Market Share Away From Shopify. But I Tell You Right Now, Based On My Homework, this Is Not A Robust Platform Like Shopify. The Customizations, The Other Apps It’s Connected With, it’s Not A Competitor In The Enterprise Space.  

[00:18:28.550] – Sean

Those Bigger Businesses, They Do Advertise The Enterprise Plan Here. But I Did Some Homework. I Could Not Find Any Larger Brands. Maybe There Are A Few I’m Not Aware. So I Don’t See Dukan As A Threat.  

[00:18:42.400] – Sean

Although This Is All The Hype Around The Internet Right Now, based On My Experience Working For Larger Companies, especially In Ecommerce, I Don’t See Them Taking Away The Enterprise Business. We’ll See Again, It’s Very Hard To Get Somebody To Shift To A Very Competitive Product. It’s Just A Huge Amount Of Effort. It Can Take Six Months, Twelve Months, Year Longer, and That’s A Very Painful And Expensive Process. So I Don’t See The Threat Here.  

[00:19:09.670] – Sean

But Keep It On Your Radar At Least. So Looking At The Moat In This Case, sure There Are A Few Competitors In This Space We Can Pay Attention To. It’s Probably One Of The Weaker Parts Of The Business. E Commerce Is Hot. There’s A Lot Of Tools Out There.  

[00:19:24.490] – Sean

I Still Think Most Of These Businesses Can Thrive, amazon Especially. I’m Looking At Salesforce. I Think That’s What They Do More Than Just Ecommerce. I Mean, It’s A CRM Tool and More. They Can Do A Lot.  

[00:19:37.610] – Sean

So That’s Why I Think That Stock Will Be Fine In The Future. Adobe, I’m A Big Fan Of That Business. I Think They’ll Be Fine As Well. So Shopify Can Thrive In This Market, and I Think It Will See Some Nice Jumps in The Share Price Here when The Market Improves. Let’s Touch On The Last M.  

[00:19:55.490] – Sean

So We Got The Management. So Tobias Luke, He Founded The Company, and He’s A Younger Guy for CEO Of A Public Company Perspective. But He Made A recent comment on Twitter that said, is there a place where financial analysts track records are kept? People seem to pay attention to them, but are they being held accountable for what they say? Great question.  

[00:20:19.410] – Sean

So there’s a lot of analysts that talk and talk and talk. Some are right, some are wrong. Whatever the issue in the statement is he’s spending his time worrying about what people are saying about the share price. And I do see that with some younger CEOs as they do get caught up in Twitter and Reddit and they start worrying about what people are saying. And I did make a reference here.  

[00:20:41.140] – Sean

He should take some notes from more senior CEOs that I really respect. One being Satya Nadella, Microsoft, the other being Lisa Sue, Andy. You will never see those two CEOs complaining about analysts or worrying about their share price. They’re hyper focused on their product and where their company is going. They’re very good at that.  

[00:21:02.060] – Sean

So Tobias, I would say turn your attention more there. I think you’re already there. But stay off Twitter. Maybe stay on Reddit as well or wherever you’re getting your feedback. But you will see that with younger CEO.  

[00:21:14.830] – Sean

So he’s got a little more room to grow. Overall, I do think he’s doing a good job with the company. I do like the buy before build strategy a lot. They’ve made quite a few acquisitions of other companies. It’s a smart play.  

[00:21:29.930] – Sean

You can go to market a lot faster. So you look at the 4Ms’s, overall financials looking pretty good. Could see some improvements there. Business model outstanding. The moat, I think it’s competitive.  

[00:21:42.290] – Sean

At least there are competitors to pay attention to, but most of them can thrive. And management, I think. So bias is doing a pretty good job. Here’s what I would do. We have the stock split, which of course probably already occurred.  

[00:21:56.910] – Sean

When this video goes live, then we have an earnings report. I think the next one is coming up in July. What I would do is let’s see what happens here. The stock is not going to take off overnight. The markets are really beat down right now.  

[00:22:09.820] – Sean

It’s not going to rally. So it’s not like going to run into a FOMO situation here. But in this case, I would pay close attention. Hopefully we see that EPS, we have our expectations and then we have our reported and we want to see that reported coming higher than expectations. It’s a great sign.  

[00:22:27.350] – Sean

So with the stock splits and that expectations being beat, I think that’s a good trigger point to say, hey, let’s get into the stock right now. Now jumping back to another video, I talked about how long will this bear market last? People are talking about recounting transition from a bear market to recession. I’m starting to hear that. Doesn’t matter what you call it.  

[00:22:47.560] – Sean

Markets way down. I feel most tech stocks, especially those that are 80% down probably aren’t going to go down too much more PayPal. Again, I mentioned I hope that stock is going to go down a little further. I really don’t think so. I think a few other stocks that are in the tech space could, and then I do believe, SMP your non tech stocks now, we could see a little more decline there.  

[00:23:12.420] – Sean

The rally could start happening this fall. If it takes a little longer, that’s fine. We’re going to be well prepared. Just make sure stocks like this when those good reports come out. Stock is on sale and you got good news all around.  

[00:23:25.720] – Sean

Keep buying more. This is the time when you methodically buy more. Just don’t take the whole chunk of change you got there in your account and throw it in all at once. What you want to do is methodically keep buying more every week. That way, if the stock keeps falling, you’re getting those lower price points.  

[00:23:43.440] – Sean

Hopefully this video helps. If you have any other stocks you want me to take a look, please leave a comment below. We’ll see in the next video.