No. of Recommendations: 51
I still own SHOP shares. I read the concerns expressed here back in the day, but decided to ride the momentum bull for longer. So far, that's paid off, but a recent thread on the paid board made me re-examine my position.

Ironically, while the particular post that set me off was properly talking about not price anchoring, the expressed possibility of another 10-bagger for SHOP awakened my internal skeptic (actually, he's been wide awake a alot recently). For, when I looked at Shopify's current Market Cap of $44 Billion (give or take a Billion ;^)), I couldn't see how SHOP could get to $440 Billion - that would place it in the top of companies world wide. Heck, the grand-daddy of SaaS stocks, Salesforce, is "only" $120ish Billion!

And then I looked at these graphs:

So far in 2019, sales per share have gone from $10.19 to $11.19. However, the stock price has gone from $138 to $385 (actually topped $400 recently). That means the Price to Sales ratio went from 13.58 to 32.37. So, yeah, the business grew, but what really fueled the stock price rise is the increased value Mr. Market put on future sales - making each current sales dollar worth 3 times as much. SHOP has grown 300% this year, Shopify's business has only grown 10%.

Clearly, a lot of people like what they're seeing coming out of Shopify. It continues to lose money, but we all know that's a necessary part of the early strategy for SaaS companies. At some point, though, Shopify will have to get its CAC (Customer Acquision Costs) down and/or it's LTV (Customer Long Term Value) up. But, perhaps more importantly, from where does Shopify's future business come?

Various sites on the web give Shopify about a 10% market share for e-Commerce platforms. WooCommerce (a WordPress plugin) is about 25%. Wix, btw, is about 4% ( ).

I suppose it's possible for Shopify to displace WooCommerce and grow to 25% of the TAM. But, that still won't get the business to the order of magnitude increase necessary for the company to be worth an order of magnitude more than it is today.

More realistic, I think, is that Shopify may double or triple in the near future, for some definition of near. With its Merchant Solutions business, Shopify takes a credit-card like piece (but smaller) of every sale from each of its customers selling to their customers. Shopify's sweet spot seems to be customers that are not themselves focused on e-commerce but still want to have a solid platform for the e-commerce they do conduct. Companies like GE, Tesla (for accessories and branded clothing, not cars), Kylie Jenner, and GitHub for instance. I don't know how many more of these companies Shopify can attract, nor at what point competition forces Shopify to cut its prices - or conversely if Shopify continues to add value to maintain its value).

But, the gi-normous increase in Price to Sales ratio just this year continues to haunt me. It makes holding the stock risky in my view, as any hiccup will erode the high premium Mr. Market has recently put on future sales. There's also the law of large numbers, and one wonders how many businesses that are in Shopify's sweet spot (not big enough to want to host their own e-commerce site, but not so small that they provide little revenue to Shopify) are still out there for Shopify to sign on.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.