Shopify is a short with ~50% downside to our $150 price target, a target we believe could be achieved
within roughly 6-months time.
Shopify is a best-in-class provider of e-commerce solutions to predominantly SMB / SME customers.
SHOP has been a tremendous growth story over the past three years, compounding its revenues and
share price at ~60% and 77% respectively since its 2015 IPO. While we do not doubt the quality of the
product (which is unequivocally superior to its competitors in the SMB space) due to the
competitiveness of its vertical, a growth-at-all-costs mentality, and its reliance on SMB customers, SHOP
boasts mediocre margins, negative free cash flow, and high customer churn. None of these business
qualities typically accompany a stratospheric valuation in the equity market, yet SHOP currently trades
at an EV / 2020 gross profit multiple of roughly 33x using our estimates or 29x on street estimates,
versus true software peers which trade closer to 9x on average, or 20x in the rare case of “best-in-class”
names like Anaplan (PLAN).
Furthermore, Shopify is not a high quality, sticky business in the same vein as these software peers.
Nearly half of gross merchandise volume on its e-commerce platform comes from commodity payments
processing for its merchants, and 58% of total revenues are transactionally linked. Our conversations
with former employees and industry competitors suggest that Shopify is running on a high speed growth
treadmill, needing to add thousands of new SMB merchants per week in order to keep replenishing its
funnel of customers, most of whom, being small business merchants, will attrit, and some of whom will
“make it.” When SHOP customers do succeed in scaling up and require a more robust platform, SHOP
then needs to compete once more to retain these merchants on its “enterprise” Shopify Plus platform
that competes against up-market players like Salesforce (Commerce Cloud / Demandware), Adobe
(Magento) and BigCommerce. Larger merchants on Shopify Plus boast lower churn rates, but also
require much more robust support and are price sensitive. Shopify Plus’s base of “MRR” (monthly
recurring revenue) is growing fast (47%) but relatively in-line with total revenues (45%) and has
persistently lagged SHOP’s growth in sales and marketing spending (up 50%+ on a TTM basis). Shopify
Plus also ended Q3 on a run-rate of just $162m in annualized revenues; extrapolating revenues forward
at a smooth glide path of deceleration of 400bps per quarter, significantly below Q3 and Q2 sequential
decel of 600bps and 800bps respectively would suggest annual recurring revenue of roughly $230m
exiting 2020, which would put Shopify’s valuation at north of 150x “true SaaS” ARRs on a forward 1-year
basis (most comps trade at 10 – 24x ARR).
Having seemingly recognized its egregious valuation, Shopify is an opportunistic issuer of equity, having
conducted three straight-equity issuances in the past 18 months alone – During 2018, SHOP sold 4.8m
shares at $137 and 2.6m shares at $154, while in September of this year SHOP issued 1.9m shares at
$317.50. We commend the management for being opportunistic and realistic about SHOP’s
overvaluation, but consider it to be a reasonable tell that SHOP eschewed even the attractive
convertible debt markets in favor of issuing straight equity.
Beyond SHOP’s valuation, we have identified the below list of potential catalysts and signals that now
may be the time to be short what has been an admittedly unstoppable growth story thus far:
• Q3 2019 was the smallest revenue beat versus consensus in SHOP’s history as a public company,
registering only 1.8% above Street versus an average of 4% over the prior four quarters.
However even more concerningly, SHOP missed street free cash flow estimates for the quarter
