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Short Positions - Jan 2018

Summary

SHOP price target of below $90.

CMG price target of below $275.

Short Positions – Nov. 2017

In this article, I will discuss two stocks I believe are overvalued and facing heavy competition in their industry. I am generally a believer in long-term gains but in these bull markets there are usually overvalued stocks and opportunities to short.

SHOP – Citron Research’s Andrew Left released his view on the Shopify stock. I am a big fan of Left’s positions but always do my own research when shorting a stock. SHOP is now trading at 15x revenue from its 20x revenue valuation before its Q3 earnings report. SHOP is the highest trading multiple on the SaaS marketing right now putting it at a valuation of close to 10B. Is this a fair valuation of Shopify? The short answer is no.

While Shopify software is very effective and simple to use for small to medium businesses, it definitely is not worth $10B valuation. Let’s put aside Left’s opinion of its FTC violation and illegal multilevel marketing schemes. Let’s look at Shopify strictly from a business perspective.

Shopify is facing heavy competition from many of its competitors such as Wix, OpenCart, GoDaddy, custom software (Magento, WooCommerce), and even Amazon. Yes, Amazon. Shopify markets themselves to small and medium businesses who most likely have a Amazon selling account and are most likely making better money on their Amazon account. Why would this be? Because Amazon has more user traffic compared to having a Shopify website which requires heavy SEO, SEM, and Social Media advertising moneyto even put yourself on the search engine map. Even Facebook pose a huge threat as it is starting to slowly integrate shopping options on its Facebook and Instagram platform.

This is a huge factor that will ultimately lead to Shopify’s users falling out because of the difficulty of putting their website in front of customers. Again, the e-commerce industry is so diluted that the amount of money to even put your website in front of user will not be worth it from small to medium businesses. So while I believe Shopify is a great platform to create an e-commerce site, its competition will eventually be the demise of its $10B valuation.

CMG – Chipotle’s queso dip is the most disgusting queso I’ve ever had. I’m not saying that just just because I had a bad experience, but because this was one of the few newest thing on their menu recently. Chipotle comes out with something new once in awhile and it’s never a game changer.

Why this concerns me? It’s because I fear that Chipotle will get left behind on the fast changing food environment as they have very little variation in their concept. Chipotle basically hasn’t changed their menu since the beginning of its existence. As well as the diluted food chain market takes some market share and customers away from Chipotle. And while it’s good to keep to your core concept, the lack of variety and innovation in their concept will catch up to them sooner than later.

So while Chiptole does have very good food and concept, it is not worth its high 7x valuation at $7B compared to its valuation of close competitors such as JACK and TACO.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.