Shopify Has A Bad Drop-Shipper Problem

Oct. 29, 2019 1:00 PM ETShopify Inc. (SHOP), SHOP:CA84 Comments
Pedro de Noronha profile picture
Pedro de Noronha


  • SHOP is an extremely expensive stock at 20.2x EV/Sales - trading at a significant premium even to other hot tech stocks.
  • It is not a profitable business, and management is investing significant capital in a series of non-core projects (reminds us of WeWork).
  • It seems probable that a significant percentage of the user-base is made up of drop-shippers who provide negative value to their customers and unlikely to survive an economic downturn.

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Shopify (NYSE:SHOP) is a blisteringly expensive stock and currently trades at 20.2x consensus EV/Sales. The serious questions about the company's valuation have been well covered on Seeking Alpha in recent months, and this article is primarily concerned with evidence of how reliant the company is on drop-shipping - but it is worth covering a few key points about the extreme valuation at which the company is trading at before we begin.

Not only is this a very high multiple compared to profitable software and e-commerce businesses (Adobe is trading at 11.7x, Alibaba is at 6.2x, Amazon is at 3.2x, eBay is at 3.2x), SHOP is a perennially unprofitable company - and as its revenues have grown, so have its operating losses (i.e. increased scale doesn't appear to be resulting in increased profitability).

Source: Company filings, Noster Capital

Although by all accounts SHOP's core product is quite good, it is operating in an increasingly crowded space, and it does not have a dominant market share and does not have a significant technology advantage over its competitors.

Ecommerce platform market share 2019


Although revenue is growing reasonably fast (consensus expects 43% growth in 2019), it is moderating sharply from the almost 60% seen in 2018 and slowing revenue growth on a very high EV/Sales multiple is rarely a good sign.

Management is also investing significant capital in a series of projects outside the company's core competency - all of which are potential boondoggles. The company has recently spent $450m on a warehouse robotics business (not especially helpful if the company is, as we suspect, heavily reliant on drop-shippers), and has ambitious plans to build its own fulfilment network.; it is investing in television and film content; and in unproven AR/VR technology - all of which suggests that management is concerned

This article was written by

Pedro de Noronha profile picture
Pedro de Noronha is the Managing Partner and Portfolio Manager at Noster Capital. Before forming Noster Capital in September 2007, Pedro de Noronha managed the European Special Situations Portfolio for the Proprietary Positioning Business at JP Morgan, where he was employed from 2003. Prior to this, Pedro de Noronha was a mergers and acquisitions analyst for the energy team and global debt markets associate covering Portugal and Italy at Merrill Lynch. Noster Capital was formed in September 2007 and is a London based hedge fund which invests globally following a value investing philosophy focusing on absolute returns. Noster was largely profitable during the string of the worst months of the financial crisis The Noster Capital Fund was launched in March 2008 and is a Global Value Fund which invests in both long/short strategies along with other asset classes. The fund is a value investing fund; it typically invests in equities offering value opportunities relative to intrinsic value, and the exposure is hedged against the market, depending on the stage of the market cycle and on the manager’s view of overall market conditions. The fund invests in any asset class and any cap, and also invests in unlisted investments.

Disclosure: I am/we are short SHOP.

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