Technology0Shopify: Down 80%, One Of My Largest Positions (NYSE:SHOP)


New clothes and products to update the online shop

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Shopify (NYSE:SHOP) sunk 15% after releasing second quarter earnings and has since kept sinking. The stock has plunged amidst the bursting of the tech bubble but the crash is far too overdone. SHOP continues to invest aggressively to support its long term growth outlook, but that will have the effect of wiping out operating profits this year. This is a market that has rewarded companies generating immediate profits with little patience to look over the long term. SHOP is trading at compelling valuations while also representing what I view to be a generational compounder.

SHOP Stock Price

After peaking at $176 per share (split-adjusted), SHOP is now trading just around $27 per share.

Data by YCharts

I last covered the stock in June where I discussed the ramifications of the stock split. The stock split has since been completed in late June but that has done little to change the negative sentiment regarding the stock.

SHOP Stock Key Metrics

SHOP generated 16% revenue growth in the quarter, with GMV growing by only 11%.

financial highlights

2022 Q2 Presentation

Management noted that they had previously misassessed just how much the pandemic positively impacted their business. On the conference call, they stated:

We expect 2022 will be different, more of a transition year in which e-commerce is largely reset to the pre-COVID trend line and is now pressured by persistent high inflation.

The net result is that SHOP made the difficult decision to lay off 10% of its workforce to rectify those missed projections. Management stated:

For the remainder of 2022, we expect a slow hiring to only the most strategic, and with the addition of Deliverr, exit this year with only a modest increase in total headcount versus the beginning of 2022.

That does not mean that the company will not continue investing aggressively in growth. In fact, SHOP is still guiding for the full-year to see no operating income due to heavy reinvestment – the company had previously generated $269 million of operating income in 2021.

Those investments include improving its B2B software – recall that SHOP can be considered an enabler of independent e-commerce.

B2B ecommerce

2022 Q2 Presentation

SHOP is also investing in its fulfillment network as it seeks to extend the reach of its 2-day shipping capabilities.

Shopify fulfillment network

2022 Q2 Presentation

Inclusive of its now-closed Deliverr acquisition, cash stands at around $5.2 billion versus just under $1 billion of 0.125% convertible notes. The ample cash balance on the balance sheet should help SHOP to weather the storm and continue investing aggressively when others may be just trying to keep up.

Is SHOP Stock A Buy, Sell, or Hold?

While SHOP is highly unlikely to generate meaningful income this year, the long term secular growth thesis remains intact. SHOP is enabling any business to create and operate an e-commerce presence. That means that SHOP benefits from a multitude of growth drivers ranging from bringing on new merchants to expanding relationships with existing merchants. SHOP is trading at around 17x gross profits which is too conservative considering that this is the type of company that should be able to sustain 15% to 20% growth over the next decade and longer. This is also a good point to remember the ultra-long term thesis: Shop App. SHOP is currently enabling independent websites and collecting a 2.9% take rate. In contrast, Amazon (AMZN) allows merchants to list on its platform and collects a 15% take rate for the sales funnel. SHOP is working on building its own answer to Amazon via its Shop App:

Shop App


I can see the Shop App enabling SHOP to increase its average take rates over time. A hundred basis points of take rate expansion can lead to billions of dollars flowing directly to the bottom line – but the long term potential involves several hundred basis points of expansion.

I also note that SHOP is founder-led, with CEO Lutke owning over 789,000 shares (split-adjusted) worth around $2.5 billion.

insider ownership

2022 Management Information Circular

It isn’t everyday that you get to invest in so-called “story stocks” at compelling valuations, but given the extent of this tech crash it also is not too surprising. Assuming a 60% long term net margin based on gross profits (30% net margin on revenues), 20% long term growth rate, and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see SHOP trading at 18x gross profits. That means the current stock price presents 15% to 20% annual return potential and that is not inclusive of the take rate expansion discussed above. I also note that I could see the PEG ratio expanding to the 2x range as this is arguably one of the more clean-cut stories in the market. The key risks here are that of competition. First, there are other anti-Amazon competitors like BigCommerce (BIGC), though I view Shop Pay as being a clear differentiator. The more worrying risk is if there proves to be no need for an anti-Amazon, with AMZN eventually winning all of retail. In that case, SHOP would be unable to successfully deploy its Shop App and drive take rate expansion. SHOP is not the kind of stock that is focused on generating present-day profits and thus won’t reward shareholders with dividends and share repurchases for a while, but it is the kind of company that is razor-focused on driving long term shareholder returns.

I have discussed with subscribers of Best of Breed Growth Stocks that the best way to invest amidst the tech crash is to own a diversified basket of undervalued tech names. I consider SHOP as suitable to fulfill a high quality allocation in such a basket, as the company’s competitive positioning makes up for the lack of profits. The valuation reset has made it possible to invest in high quality tech stocks at compelling prices – SHOP remains one of my larger positions.


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