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Time Is On The Side Of Shopify Investors

May 03, 2018 4:42 AM ETShopify Inc. (SHOP), SHOP:CABZUN, META26 Comments


  • While growth is slowing down, it's slowing down less than we feared, and the company is still in hyper-growth phase.
  • To boot, it enjoys an entrenched market position, powerful platform economics, and the kicking in of operational leverage.
  • The valuation is steep, though the losses and dilution are still substantial and the share based-compensation rich.
  • We never feared any blowback from the Facebook/Cambridge Analytica saga, though.

In February last year, we advised buying the shares (in the low $50s) of Shopify (NYSE:SHOP), and the shares continued to rise inexorably for much of last year. This year, the sailing is a little tougher.

We predicted that growth would slow down, but that was hardly controversial, given that a hyper-growth triple-digit rise is simply difficult to maintain as the company becomes bigger - the law of large numbers.

We have a habit of looking at business SaaS service provider platforms through a specific lens of the business model, which consists of the following generic steps:

SaaS business service model

  1. Get a foot into the door with a killer app, something at which the company is good at that fulfills a real business need.
  2. Convert license clients into recurring revenues via SaaS in the cloud.
  3. Expand users (seats) at existing customers.
  4. Expand geographically.
  5. Have a nice side business called services, where you help customers understand the product, show what it can do for them, and train them and help in installation, configuration, etc.
  6. Open a partner channel, i.e., build a community or ecosystem.
  7. Use the recurring (subscription) revenues to build out sales and R&D.
  8. Use R&D to build additional functionality and/or verticals, modules that can be used to up-sell ("land and expand").
  9. M&A might be used for the same purpose as R&D - to acquire new capabilities to up-sell.
  10. Open up the platform for third-party/customer apps and take a share of the cut or use it to solidify the platform position and value.
  11. Grow revenues in order to achieve operational leverage.
  12. Ultimately, earn enough free cash flow to deleverage (where applicable) or allow the company to buy back the shares that are issued as stock-based compensation and/or pay dividends.

Not all of these steps are equally important, or even

ChartSHOP Revenue (TTM) data by YCharts

ChartSHOP Revenue (Quarterly YoY Growth) data by YCharts

ChartSHOP Gross Profit Margin (Quarterly) data by YCharts

ChartSHOP Shares Outstanding data by YCharts

ChartSHOP EV to Revenues (TTM) data by YCharts

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

Providing a marketplace service Shareholdersunite Portfolio

Finding the next Roku while navigating the high-risk, high reward landscape.

Looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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