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Shopify on Pause - Time to Scoop

Romans Chapter 3 verses 23-24 state, "for all have sinned and fall short of the glory of God, and all are justified freely by his grace through the redemption that came by Christ Jesus."


I like this verse as it clearly states that no one is greater than another - ALL have sinned and ALL are justified through the redemption of Christ Jesus. I cannot claim to be better than anyone because I am not perfect. This is important as pride can make me believe that if I do "better" by sinning less, or in my own perception, less egregiously, then I am performing "better". This is a lie, and will separate me from others, especially through the "holier than thou" label, which gives Christians a bad name. Jesus two greatest commands from the Ten Commandments are to obey God will all my heart, and to love those around me as I would love myself.


Pride is dangerous with respect to relationships on every level, it is also dangerous from an investing standpoint. If I for one second think that I am better than analysts, fund managers, the guy next door, Jim Cramer, etc., then I am setting myself up for failure. As a current non-professional in investing with 20+ years investing experience, it's easy for pride to attempt to chip away. Like Jesus two core commands, I need to keep a level perspective on investing. First, I must recognize that the market is above anything that I produce (I'm not a market maker/mover), and second, I must respect all those around me as I would want to be respected regarding investment opinions and discussion.


When it comes to investing, I don't spent a lot of time on mainstream news, aside from major actions like the current war/geopolitical tensions, Fed policy results, or other things that have an immediate impact on markets. These are critical moments to determine investment strategies and actions. When it comes to Wallstreet analysts, it is pretty much the same - I typically focus on the bearish thesis, or impactful stances where SPs move aggressively.


When it comes to Shopify, Inc. (SHOP), it's been a rough ride since 2021.

Ironically, SHOP's SP peaked late in November 2021 at over $1,700 per share. Since then, it's down 65%. Investors need to recall that during 2021, there were three peaks depending on the company - February, July, and November. The majority of stocks peaked in the February and July points.

From a historical valuation perspective, SHOP is trading at levels not seen since 2018 for EV/Revenue and 2016 for OCF/Share. Clearly, 2019-2021 was peak valuation for EV/Revenue and hard to justify as sustainable. For OCF/Share, it's a different story as SHOP has been witnessing Cash Flow inflection of late, with room to grow over time.


This is where it gets interesting. I came across Benchmark's assessment on SHOP and it is definitely one of those mixed takes. The key points are:

  • Benchamrk's rating is Hold with no Price Target

  • The key theme is a tough acquisition and economic environment for the company

  • Ironically Benchmark is "incredibly bullish" for GMV capture over the long-term

  • The summary is that it is challenging to recommend SHOP near-term given both macro and fundamental headwinds, expected over the next year

This is a great sample of how to deconstruct the logic and underlying themes. What clearly stands out are as follows:

  • Hold rating, no Price Target, "incredibly bullish" long-term

  • Environment - tough on acquisition/economic and challenges for near-term macro and fundamental headwinds

  • Near-term concerns v. long-term potential

Essentially Benchmark is on the fence and not willing to put their take out there, and much more interested in a lower SP to justify conviction. I find SHOP intriguing as after reviewing the company's earnings report and forecast for 2022, I came away with a more modest financial model assumption for 2022 versus the average analyst. At the same time, SHOP continues to strongly outperform payment peers, regardless of scale.

While companies like Fidelity National Information Services, Inc. (FIS) and Fiserv, Inc. (FISV) have taken a growth-by-acquisition approach diving into Fintech, the key stalwarts remain in Mastercard Incorporated (MA) and Visa, Inc. (V). While PayPal Holdings, Inc. (PYPL) has emerged as the digital payments leader topping $1.2 trillion in TPV. This leaves both SHOP and Block, Inc. (SQ) as the faster growing smaller peers.


To this point, I believe that SHOP's GMV will slow faster than TPV which can still see north of 50% growth. Factoring for take rates, and I'm assuming that SHOP generates $6.9 billion in Net Revenue, while average analysts are calling for $7.6 billion with no one below $7.2 billion. This equates to a 65% Net Revenue growth rate, accelerating by over 14% from the 2021 growth rate level.

Regardless of my low-end assumption, this is simply far and beyond peers for 2022.


So what's the deal with the comments on near-term headwinds? I think it's simply a cautious stance on valuation as SHOP is clearly poised to continue to lead TPV growth. So how we view valuation is the pressing issue?


Historically, SHOP can be justifiably valued north of 10 times EV/Revenue. I think that SHOP will grow into its OCF/Share multiple and still believe that 75 times is reasonable, especially as the company has potential to track towards $20 billion in Net Revenue. By this time I am expecting PYPL to be the Net Revenue leader of this group at $44 billion - yes besting both MA and V. PYPL is a testament to older Fintech's ability to develop a new model and outperform legacy peers, despite lower TPV.


SHOP's business model combines both GMV and TPV blending a unique perspective of merchant products and services. Today, SHOP's TPV is 49% of GMV, and I am forecasting this to increase to 70% over the mid-term. Clearly, the Merchant Solutions side of the business is the key growth driver, benefitting from a sustained increase in GMV. For those not aware, SHOP is the number two GMV generating company in the U.S., second only to Amazon, Inc. (AMZN).


So back to valuation, how do we think about valuing SHOP? Let's look at a couple charts for MA and V to get a sense of historical valuation.

MA has an interesting valuation relationship, as OCF/Share has grown into valuation with current multiples sitting at near 40 times in 2022 from near 180 times in 2008. EV/Revenue has remained elevated, gradually step-increasing from 2011, 2016, and 2019. Today's EV/Revenue multiple sits at 18 times, from 3 times in 2008.

Interestingly, V has generated a nearly identical valuation historical result, with today's OCF/Share multiple sitting near 25 times in 2022, versus nearly 300 times in 2008. EV/Revenue has step-increased similarly with the current EV/Revenue multiple at 16 times, versus 4 times in 2008.


Taking SHOP's historical valuation information and adding my forecast valuation multiples, here's what we get.

I don't often consider that companies should trade with an EV/Revenue level from 15-20 times. The companies that do in my opinion are ones that win big. As SHOP continues to benefit from the combined growth in GMV and TPV, Cash Flow margins will continue to inflect. While I doubt they will be at the level of either MA or V, like PYPL, SHOP is projected to achieve Net Revenue levels equivalent to MA and V's past, with a lower TPV. Newer companies are figuring out how to grow TPV with higher take rates, albeit, with lower margins - but Cash Flow is still inflecting towards 20-30% levels.


Newer Fintech business models are challenging legacy payment companies, and even older Fintech peers like PYPL. While I believe it is very clear that SHOP was extremely overvalued during 2019-2021, today's valuation presents a much more compelling opportunity for the future. With the stock split forthcoming, buying below $600 may not be a bad move for investors. The end result of my financial model for 2026 affords a Price Target of just over $2,300 - an annualized return of over 30% from today's SP. While firm's like Benchmark are fishing for lower SPs, SHOP's future is looking very bright. I think most are in agreement that SHOP's long-term potential is lucrative, the debate and self-interest is in the SP, and how low of a cost basis can be had.



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