Chit Chat Stocks - Shopify (SHOP) | Not So Deep Dive

Episode Date: November 16, 2021

Shopify is a Canadian-based e-commerce business. The company is well known for enabling merchants to launch a business. Shopify offers low code website development, assists in fulfilling orders, and also facilitates payments. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Shopify. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:45) Industry | (8:46) Management & Ownership | (11:56) Valuation | (16:09) Earnings | (17:53) Balance Sheet | (20:27) Our Analysis | (21:43) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode. We have Brad Freeman on the show today, and we're going to try to go over the basics of Shopify, one of the most well-known companies

in the world. We're going to try to give you the basics of how the business runs with a little bit of the history, kind of what we think, some of their future growth opportunities. We're going to try to hit that in about 30 to 45 minutes. Should be a fun show. Brad, I have to ask, but I do this every time. Have you ever invested in Shopify? Do you know about the company? How long have you heard of this company?

Yeah, so I was invested in Shopify, unfortunately, several years back and thought I was a genius by taking some profits and clearly looking at the stock chart for the last four years. That was not the correct decision, but live and you learn, I guess. But in terms of my investing experience, I haven't dabbled in it since then. It's been a few years. And then for anecdotal evidence or just my experience with it, I don't have a lot of experience building websites, but I'm sure all the websites we visit are, or a lot of them are powered by Shopify in some way, shape or form.

So yeah, it's a business that a lot of people use, but don't know that they're using it, which is kind of interesting. It powers a good percentage of e-commerce sites now and a lot of the e-commerce, at least in the US. But we'll get to a lot of that later. And I'll let Ryan introduce the company. But first, we have to talk about our sponsor for the show, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10x over the next 10 years or compound at 26% per year. Now, they've given us some examples in the past. And this, luckily, is an episode where we're covering actually one of their past examples. So they actually picked Shopify

at $77 a share. I don't know how many years ago that was, but so far, if you look at the price of Shopify now, it has been a phenomenal performer for them. And that's what they're looking for. There may be a little bit riskier picks, but they're high growth opportunities. And that's what they're trying to do. Trying to look at stuff that can go up 10X over the next 10 years, and they're providing great reports with it. I even looked at the Shopify stuff at potential multi-baggers while we were researching this episode. So really, really detailed reports. And if you want to become a multi, you can go to Seeking Alpha and look for From Growth to Value, Google it, or go to at From Value with no capitalizations on Twitter.

And if you can't find it, we can point you in the right direction. So make sure to contact us if you ever have trouble with that. We don't want anyone missing out on the service if they want to use it. Ryan, I'm going to let you introduce the company and talk about the special promotion we have for 7investing this winter. Yeah, I'll make this real quick. You can use code CHITCHAT if you're thinking about signing up for 7investing. you have to use it on the annual. And if you use code chitchat, you get $50 off.

I've got, they sent us a banner. So I've got a 7investing banner behind me. I don't think, you know, listeners aren't going to be able to see it, but that's how much they care about their partners. So little token of appreciation from them. And this is a limited time offer. So it's $50 off your annual subscription through the end of 2021. So if you've ever thought about doing this, this is a perfect time to help yourself out and sign up for 7investing. Ryan, do you want to introduce Shopify? I want to say one of the most well-known companies and probably one of the best backstories in business. Yeah. If you're an investor or have been for the last five years or any time in there, I'm sure you've heard of Shopify, but they are, I guess,

for anyone that doesn't know, they're a commerce platform that enables merchants to start and grow their business. So pretty much anyone can set up an online store with Shopify's no-code solution and begin to sell whatever products they want to sell. You can sign up and use Shopify for 14 days without needing to pay. But after that, once a merchant wants to start selling, they have to subscribe to one of Shopify's pricing plans. So this is their subscription component of the business. And there's basic, which is $29 a month, Shopify, which is $79 a month and advanced, which is $300 a month or $299. And then they also have Shopify Plus, which accounts for, I want to say somewhere in the 20% of their subscription, their monthly recurring revenue.

And so that's enterprise grade customers. So I think like Allbirds, Heinz, stuff like that. I'm trying to, Jim, sure. They highlight like the Kardashians, I think, use it. Yeah, that's more like, I think it's more than $2,000 a month, most of those plans. But that gets categorized as their subscription solutions revenue.

And then they have merchant solutions revenue as well. So this is all the additional features. Oh, I should also include that subscription solutions also has, so they offer point of sales systems and you can subscribe to like their, I think it's called like point of sales pro or whatever, which is kind of just a retail dashboard or sort of a operating center, digital operating center for your business. If you run like a physical store, you can subscribe to that too. That gets included there. But I think the majority that comes from this online subscriptions, uh, their merchant solutions revenue, this is like additional

features that any merchants might need to operate their day-to-day business. This includes payments, shipping, fulfillment, working capital help. So like loans, I think it's called Shopify Capital. But the majority of that, I believe, comes from Shopify Payments. They also have a fulfillment network. So you can use that if you want, if you're a merchant. The functionality is pretty similar to any third-party fulfillment, but you get, as a merchant, you don't have to use multiple providers. You can keep it all in-house. It makes it really easy on the merchant side. I might be forgetting some stuff. There's a lot of different merchant solutions things that they offer. They really have a pretty comprehensive suite of tools for anyone that's trying to start

a business like that. Did I kind of touch on everything? What about the app store? Do you know anything about that? They have apps like the big ones out there, Global E, Avalara, some other stuff like that, that they have a taper on that. They have the app store. People can sign up for these special other services and i'm sure they have a revenue sharing partners almost like if you if you use globally you can use it through shopify and shopify gets whatever a kickback i imagine yep um but i'll talk about the history it is pretty kind of a fascinating history so according to their annual report the company was first incorporated in 2004 i think at the time it was filed under like an employee identification number so it was just some long like six digit

number um but in 2006 they changed their name to jaded pixel technologies do you think they should have kept the name brad do you want to go first no no so the story as it goes was they uh they were first established because uh toby litke wanted to build a snowboard shop where he would basically uh connect people looking for snowboards to third parties um and he realized he was trying to do it on Yahoo stores, or there was a few different service providers that he was using to try to assemble a website. And he realized that the solution sucked and there wasn't a lot of customizability. So he couldn't even put in his own logo when he was trying to do the Yahoo stores. And he basically said, why don't we just build this from the ground up? And so while he was

building his snowboarding business called Snow Devil, in the process, he built the framework for it as well so i believe he was using what the code was called something like rails and it was basically he just built the bare bones for building a website and so after releasing snow devil he then released i think it was about a year later he released uh what became known as shopify and i posted a little picture here of what shopify looked like in its early days listeners won't be able to see this but just so brett and brad can kind of see it looks like it's from 2006 yep Yeah. Their name didn't officially change to Shopify until 2011, but they ended up coming public in 2015 and it's been a great product market fit. You can imagine if you're, it's a very intuitive way to start a business and they caught onto the e-commerce trend pretty early. Yeah. And it's been a phenomenal grower. I'm sure we're going to get into some of the numbers. They've grown rapidly in about a decade after launch. I'll hit industry and competition. In 2021, e-commerce revenue was supposed to be about $4.9 trillion worldwide. This is according to Statista. I don't know exactly how you say that, but that's kind of a... I don't know if that's how trustworthy that is, but it's supposed to be huge.

However, $2.1 trillion of that is from China, and that is the largest market for e-commerce worldwide. So Shopify would not have much exposure to that. So the TAM opportunity, if you kind of want to judge stuff in that, is a lot less. And then again, if you're looking at Shopify, they make money on a small take rate of e-commerce sales. I don't know exactly what their take rate is. I'm assuming it's, I don't know, 3%, 5%. I don't know if they give out that number. I didn't see anything in their SEC filings or earnings reports for conference calls, but they're not taking the entire transaction like Amazon is. Well, sometimes Amazon is. So the opportunity is only a fraction of this larger industry. I think that's something that

people need to be aware of before investing in this. This is really just a B2B platform, and they're not going direct to consumer, at least not yet. And then competitors are pretty easy to understand. So they have two buckets, I would put them. They have direct competitors who are trying to do the same thing as them. So there's BigCommerce, there's Wix, uh, Squarespace, Weebly, WooCommerce, and many others. Shopify in this regard is the clear leader. There's no one that's even close to their size. So they're really running away with this e-commerce market right now, especially in a GPV or gross payment volume, which means the amount of dollars that are flowing through the Shopify platform. That is a lot larger than anyone out

there. Um, and then indirect competitors would be Amazon, Walmart, Target, think of the big box. Uh, I don't want to call them aggregators because that term's used too much, but basically just the first party e-commerce websites that have a bunch of different brands with them instead of the brands going direct to consumer. So if you think for an example, um, okay, let's just use a big brand, Nike Heineken, or, or are you using ones with all birds? I'm just, what is the example? It's just a fake example. So example, Nike could sell on Amazon. That's pretty easy. They go directly to Amazon's customers. Um, uh, but if they wanted to build their own direct consumer thing, and they didn't want to build it from the ground up, they would turn to Shopify. Now,

with that example, it's probably bad because Nike is so big that they probably do everything in house. But for everyone that's smaller than them, Shopify is a great third-party solution to do that. And I don't need a . I'll mention some of the enterprise customers that you would think could build something like a D2C solution in house, but instead opt to use use uh shopify so uh logitech is one and that's a pretty well-known big public company heinz heineken molson coors well i don't think heinz could build their own website i mean they're pretty old business i'm sure they have enough money to hire a few developers but uh yeah there's there's plenty of companies that the this is just an easier solution for them

Yeah. It seems like only the biggest of the big Apple, Nike, whatever, are not going to something like Shopify. All right. Looks like Brad, you have management and ownership. You want to introduce the executive team here. So moving on to management and ownership, Toby Lutke is the current CEO, obviously, of Shopify. He was a co-founder. And this started, again, in 2004. He's not a super old guy. So this is most of his professional experience at this point in time. And that's perfectly okay, considering the 13 years of success he's delivered at Shopify. So he was the CTO from 2004 to 2008, then became the CEO. He has a 90% Glassdoor rating, and there are over a thousand reviews. So that can be taken more seriously than I think a lot

of these Glassdoor ratings can be taken. In terms of, or moving on to Harley Finkelstein, or Stein, I'm not sure. He is the company's president since 2010. Again, not a super old guy. Again, been there for 11 years. So again, not a ton of notable experience outside of this really important prominent role. And again, just like Toby, he has delivered admirably for over a decade. So that again speaks for itself. Scott Lake is another one of the co-founders and was the CEO until 2010. So it looks like Toby and him were co-CEOs from 2008 to 2010. He's doing his own thing now. He's running a venture fund, pretty low key. Looks like he was ready to kind of slow down a little bit in his professional endeavors. Daniel Winand was the other co-founder, the third

co-founder. He was the chief culture officer until 2017. And now, after he left, he founded a music studio. And his most recent experience on LinkedIn is composer. So he also seems to be slowing down a little bit in his professional endeavors and just taking life easy. And I guess with all the success he's had at Shopify, who can possibly blame him for that? But the CFO is Amy Shapiro. She's been there since 2018. She was the former CFO of Betterment, which is an online financial advisor firm with $13 billion in AUM. So pretty sizable firm. She was also the former CFO at Spot Trading as well. And she was a CFO of another random private SaaS company for customer resource management. That's where they focused on. Other lines of experience for her, vice president of

iBanking at Goldman Sachs, casual, and former manager at Ernst & Young. So she does have a lot of good experience. And the new CTO, or I should go former CTO first. So the former CTO was Jean Michel Lemieux. He left in July of this year. And again, he's now self-employed. So it seems like the other two guys just kind of taking life easy. The new CTO is Alan Line One. He really does have an impressive resume. He was a former senior VP of engineering at Slack, the former CTO and VP of cloud and infrastructure at ServiceNow. And he's a current board member at Anaplan. So he really does have the best experience, I would say, outside of Shopify. Moving on from the makeup of the management team and moving on to ownership. This data is as of April 2021. It could have been

updated a little bit since then, but it should be pretty close to completely accurate. Toby owns 0.2% of class A and 65.6% of class B shares for 34% of the voting power. An organization called Clister Credit Group owns 31.4% of class B and 16% of the total voting power. The CEO of Clister is John Phillips. He has a board seat with Shopify. It looks like they were a pretty early investor. He and his wife own, interestingly, 100% of Clister. So good for them. So moving on, a group of 12 company insiders owns less than 1% of the class A stock and 97.7% of the class B stock for about 50% of the voting power. So like we see with a lot of companies, software companies, Class B really is where the voting power comes from, and insiders still own a very large chunk of the Class B stake.

This is an institutional ownership darling, very healthy presence from exactly who you'd expect, Vanguard, BlackRock. All the bellwethers are heavily involved in this name. Yeah, so I'll get into it with the valuation. This company is not small anymore. They have grown extremely quickly. And I don't know if they're a hundred bagger yet, but they might be close since the IPO, but I'll hit in the valuation market cap is about $188 billion and ticker is SHOP. So shop, very easy ticker to know they are not losing money and have a lot of cash and equity.

So I think enterprise value is more appropriate and it's actually brings it down quite a bit. So their enterprise value is closer to $177 billion. EV to sales is 42, EV to gross profit is 77. I think the most important number for a company like this, and we talk about it a lot, is probably EV to gross profit. So that EV to gross profit of 77, I'll repeat that again, is a very important number. They mentioned in the SEC filings a few different headwinds and tailwinds to gross margin that could appear depending on what parts of the business pick up in the future. So it's hard to tell where gross margin will head over the long term. It feels a bit uncertain, but probably not going to move too crazy in either direction. And nicely, they only

had about 2 million in options and rsu's outstanding versus 125.6 million total shares outstanding so dilution rate shouldn't be too bad they don't have a terrible history of that which is kind of nice compared to a lot of companies in their um i guess industry if you just want to do software and technology in general uh who have like a three to four percent dilution rate per year and shopify's is probably less than yeah based on their granting pace it's less than 1%, I think. Yeah. They have done follow-on offerings after the IPO though, haven't they? Yeah. I'm talking about dilution rates from- Just stock options. Options and RSUs. Yeah. So the follow-on offerings, I guess I would put into a different

bucket. All right, Ryan, do you want to hit or miss? Yeah. Over the last 12 months, they've generated $4.2 billion in revenue. And in the most recent quarter, the total revenue was growing 46% year over year. About 30% of that comes from subscriptions and the remainder comes from merchant solution. So they give you their subscription numbers. So their monthly recurring revenue, and I believe this excludes all merchant solutions, was about $100 million. So that's what they're generating purely out of their basically subscriptions. As it sounds, it's recurring revenue. And then the third quarter GMV or gross merchandise volume value was about $42 billion, up 35% year over year.

Their trailing 12-month operating cashflow was $489 million. So they have about a 12% operating cashflow margin. So it's not negligible, but- Is the majority of that stock comp? I probably, I guess I haven't looked at it, but the 12%, they probably have run to grow on that, but it's also not meaningless

at some of the companies we look at. What's the gross margin? You might've just said it. gross margin was 55% over the first nine months. And that's actually up year over year. I think that's largely due to an increase in gross margin from the merchant solutions. So they're starting to unlock a little bit of higher margins on that merchant side, which I believe had been weighing it down previously. And then net income looks really high for the quarter because they have an unrealized gain on equities that they own. And I believe a lot of that is from their pre-IPO

investment in global e that's correct so i wouldn't yeah i wouldn't pay attention to that that income figure as something going forward unless they sell a whole bunch of stock but i imagine it's kind of like this weird paradox because they can invest in a company and then they can announce that they invested in the company and the stock goes up so it's like they're gonna have artificially high income but i imagine they're not able to sell that for a certain period um so yeah they'll be in the lock-up period uh but i mean that's not that's not operational revenue or income so i mean you know but did you see the stock comp number did you figure oh yeah i got i have it up let me check stock base compensation over the last nine months

because that's what they give us is 232 million versus 243 million and cash flow for operation so they're basically just fine you know it's all stock comp for the operating cash flow i believe It's not like a negative or a bad thing. It's just something to consider. All right, Brad, do you want to hit balance sheet? For sure. The company, as of its most recent quarter, had $7.5 billion in cash equivalents and marketable securities. That was versed somewhere between $6 and $7 billion last year. I can't remember the exact number, but it was between that. It looks like it has more recently issued a billion dollars in convertible senior notes with a 0.125% interest rate. Keep in mind

that the note holders do have some pretty strong conversion rights, which always places downward pressure on the interest rate and is why a company like this is paying a 0.125% interest rate on these convertible notes. It also raised a little bit more than a billion dollars this year with a class A share offering. That sounds like a big number, but again, when the enterprise value is 177 billion. It's pretty, it's pretty, pretty small. I don't want to call a billion dollar raise small, but it's pretty small for them. And yeah, other than that, not a lot to note. Yeah. No worries with the balance sheet. They actually utilized it. You could argue pretty well taking the stakes in those companies using their inflated stock price, or I wouldn't say

inflated premium stock price that has gone up a lot to raise some cash with that high price to sales. So, you know, no complaints in that regard. All right, let's take the ad break and then we'll get back for the second half of the show. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com.

This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back. Next up, we have anecdotal evidence. This is kind of a tough one because Shopify is more the back end for a lot of websites. So it's kind of hard to tell whether the user experience is good. But Brad, do you have anything for us? Probably, but I have no idea. It looks like Ryan shopped on a website that I have shopped on before. So by default, I have anecdotal evidence, but I'm not going to steal his answer. So move on to him. But I mean, that's something that's good about Shopify's solution is that you are focused on the brand and not Shopify as a customer. So the only way you'd know that it was Shopify, the layouts can be similar across different brands. That's why all those e-commerce sites look the same, if anyone ever wondered. Yeah, you'd have to scroll down to the bottom and I think it has a powered by Spotify or Shopify. Oh, drink. That's the first time someone mentions that. I think that's a fun drinking game. We do a Spotify or Shopify discussion whenever you mix it up. Sorry.

Anyway, but I've shopped on Allbirds, which they used Shopify from the start and they just went public actually. So kind of cool to think that businesses can use Shopify and get large enough to the point where they can go public. um but yeah i enjoyed my experience i guess it wasn't i don't know if that's as much a testament to shopify or all birds but it doesn't break i mean the website doesn't break i mean that functions well that's probably all you can ask for um but one thing i would note with um all birds is that if you want to look at where the value is accruing in the industry and why a platform can be better than like the actual person that's selling i would look at shopify's like stability and then all and margins and all that stuff and then all birds is income statement it's not as uh maybe pristine or shopify's go look at all birds cost of revenue

yeah imagine you're gonna get bullish on shopify yeah exactly exactly um anecdotal events i don't really have anything i download the shop app uh i'll talk about that in the future growth opportunities uh so let's move to that brad what is your future growth opportunity for shopify Yeah. So we hit on or we briefly alluded to Orion to Shopify being a true partner for all these companies approaching and pursuing e-commerce. So when I think about that future growth opportunities, I kind of it reminds me of Olo almost, but a way less specific Olo. Olo is kind of doing this for restaurant chain specifically, and they do a lot more than just building websites. They handle dispatch and delivery and kind of run this live auction for bids to force these vendors to price compete and boost margins. So just little things like that, I think as the true partner and as the we're not competing with you, we are uplifting you.

Shopify has kind of put themselves in a position to extend the utility they're providing and to do these things like handling, not actually fulfilling anything themselves, but just facilitating fulfillment. so that it's a little bit more profitable for entities. Also things like cross-border commerce. We've talked about them being invested in Global E. It almost makes sense for me, just for them just to buy Global E and to put that and incorporate those offerings and to kind of accelerate their international growth as well.

At the same time, Global E is, I think, an Israeli company. But yeah, I think there's just a lot more they can do with how they've positioned themselves as this um really really supportive um and uplifting partner and i think they released a product to help with cross-border i believe it's called shopify markets so they're definitely i don't know the exact details on that product they have a lot so i couldn't remember you can't remember everything going into the show what i find fascinating is that isn't that what globally is doing yeah so that yeah i think if i was globally i'd be like oh all right um even though

So I think I sell our stake and then maybe start competing with us. Maybe we should sign a non-compete. But that's interesting. I don't know. But Ryan, what do you have? Yeah, so I think at Shopify's size, you can still – obviously, you have to make the marginal improvements on the merchant side just because that's going to keep up the quality of the business and it'll keep the merchants locked in. But I'm not sure those marginal improvements are going to move the needle. for the company at large. So I think they have to find new, new target markets to be sort of

the backend, the website creation tool kind of move into areas like restaurants. Like I know they have a solution for their, for restaurants, but it seems minuscule. They, they don't seem to focus a lot on it. Just move away from, it doesn't have to be purely commerce. Like you have a really intuitive canvas for building a website why not let it apply to all sorts of creators or businesses not just someone that's selling something yep that's um yeah they would more like blogging yeah with their best in class e-commerce design and maybe that's why they're the best in classes they have to focus but if they had the same product offerings as wix you would think they would be able to compete for that and someone like wix is growing pretty quickly so like

it seems very easy to uh to go into that bratty of something yeah i don't know if we've mentioned this already i think shopify is pursuing some kind of pay module like everybody else in software as a service so that that's probably something else that they're focused on to boost their tam and growth going forward right and that's uh they have point of sales are you describing something else i don't know or i think no i'm describing point of sales um you would know better than i do here yeah the they have that uh they said i believe on the conference call that it's still like early days for that so i think it just means this might not be a priority but what's just the point of sale system yeah it'd be kind of interesting to see how much they get sold down

to people like that run say a they started up an e-commerce site and now they're going to try to do a brick and mortar thing uh so that could work but braddy have something do you know i'm just a question for you do you know if this point so it sounds like this is a pretty hardware centric extension of their business model. So I get maybe not a question, but I would be interested to see what kind of impact that has on their input costs and their gross margin. I mean, I would think it would be downward pressure, kind of just basing off of companies like Square selling their hardware at cost and Toast doing the same thing. So I don't know how attractive this could be from a margin standpoint, but again, it could enhance that utility and just create stickier users.

yeah i think they'll make it up in volume and realistically not as a joke they yeah and they sell the part of their point of sales pro or whatever is added in their subscription revenue so there's digital services that go beyond just the hardware yeah i'm looking at their website it looks exactly like square clover they all uh they all look the same it looks exactly the same and i'm sure it's good yeah shopify point of sale light is free ish and you get charged 2.4 percent shopify pro is a subscription plan 89 in usd per month per location so not bad what uh what's your future growth opportunity all right uh so the most bullish thing i'm on like for me with shopify is the shop app so i'll describe what this is because i don't think it's it's

not ubiquitous um but it has 4.8 stars on the google play store and i think it is for good reason so i downloaded this morning to try to see what it was um and it is pegged as an order tracking app that's what it says on it but it really is a lot more um so on the tracking part it does that extremely well it actually when i downloaded it and logged in with google it automatically added an order i had somewhere else and i was like has this been shipped to you and i was like yeah it has been and i clicked it and then it went away in this queue so it's very nice and then it automatically added my card and automatically added my shipping address so i was like wow this is amazing you know how long in i don't know that's it's just a small thing but like

logging that stuff into somewhere, it just takes like a few minutes and you're like, oh, why can't someone do this automatically? Turns out Shopify is doing that. But really, the most important thing is the search and shopping function they have that actually felt very similar to Amazon. And it looks like a better and cleaner wish.com. I think it's a great way to counter position versus Amazon, but basically aggregating all the Shopify customers, putting them in the search function, and then allowing people instead of having to browse the internet to find people that, you know, sell things direct to consumer. They can all do this through the shop app. It could also help with take rates. I think there's a really, really large opportunity

to go into this and convince people to get off of Amazon and to become not members because it's free, but just use the shop app. Do you guys have any thoughts on that? Because I know it's kind of new. Brad, maybe you go first. And just my only thought is that sounds really exciting and very intuitive uh for them to kind of pursue yeah how much yeah how incentivized would you be like ryan to download that and start using well i use the app uh i've used it before to track purchases but i don't i don't know if i'd necessarily use it as this like for discovery uh but i'm probably not the target consumer for that i don't i don't spend a ton of time shopping all right and let's move to highlights and lowlights then brad what do you like and dislike about shopify

Yeah, to put it extremely plainly, this is an iconic company. They saw a future world-changing trend in e-commerce, and they essentially trailblazed it and created a better way to facilitate it. So the growth has been phenomenal for a long time. Management is phenomenal, despite the fact that they don't have a lot of experience outside of Shopify, because I'm sure if any of them left and went somewhere else, I would just look at their resume and see, oh, former CTO of Shopify, check, awesome, he's great. So that kind of reputation that they've built is nothing sort of admirable. In terms of lowlights, I do wonder how far along into this incredible, unfathomable success story we already are. We all have alluded to in different ways, Shopify needing to do a lot more in the future than they're currently doing now to not only justify $180 billion enterprise value, but to justify if people are looking for a 10 bag or a $1.8 trillion enterprise value.

enterprise value. So, um, there, they have a lot more to prove, I think, to, to, to go from large cap to mega cap. Um, and there's no, there's no guarantee that they'll, they'll meet, they'll meet these endeavors with the same traction that their first product, um, was met with the same enthusiasm that it was met with. But I mean, with Shopify, the odds are pretty good, um, that they'll figure it out. Right. Ryan. I mean, the highlights are pretty much everything. The business model is Like if you could think of a perfect business model, this is pretty much it. I also like management. I think they've done a really good job managing having a premium stock price.

I think they've been able to raise the necessary amount of cash without making it hell for shareholders or diluting too much. So I'm kind of impressed with that. Yeah, it's like the opposite of how, like say, I don't know, this is everyone's favorite company, but it's the opposite of how Tesla kind of manages their premium valuation where it's all chaotic. Shopify just does it. It's simple, you know, but they do the raise and they raise it quite a bit, you know,

with their premium valuation. Right. And they've done a phenomenal job growing into it because all along the way, we've said it's premium valuation and all along the way they've grown right into it. So I guess highlights, there's plenty across the board, low lights for me. They may be coming off an unsustainably high e-commerce year.

They might be able to fill that with new merchants, but I think we're seeing it that there will be some portion of commerce sales that stay in person forever. I think that's just inevitable. And last year just might have been an artificially high percentage that was done online. And they're only a small derivative of online sales. So it's like, they're not first party, like their GPV number, they can be as big as Amazon quote unquote doing, I don't know what's Amazon's 250 billion, maybe in revenue. If Shopify is doing that in GPV, that is a lot less revenue for the company. Yeah.

Uh, low lights though. I think, I think any low lights are probably going to end up being nitpicky. I think sometimes they waste a little bit of money. Uh, so they have studios or Shopify studio. I think that's kind of dumb. um, some sort of video content, right? Yeah. They built out like a video about how an entrepreneur quit their job. And I don't know, it just seems kind of like a waste of money, but I guess optionality. Um, and then the other one was they're building a retail store,

uh, to present, I think some of their hard goods, but I don't know how necessary that is. I think if you have an online store, you could probably take one of the solutions without going and seen it in person, but those are, once again, nitpicky lowlights. Yeah. All right. I'll hit my highlights. I like the combination of recurring revenue and the reliance on payment volume. So when you have the recurring revenue, I think that's a very resilient business model. Yeah. They're going to have a lot of churn because small businesses are going to turn off a lot when they go out of business. But I like that. I think the subscriptions are, again, they're very reliable. And then you can also ride the e-commerce tailwind with the

reliance on payment volume. So you combine those two together. That's why they've been such a durable grower over the last decade. Shop app to me seems like an amazing opportunity here. A lot of quote unquote, you know, optionality as people say to build that out. And if it can become a great place for people to actually shop, that could be, you know, something that truly competes with Amazon. And then I also love their capital allocation strategy. Like you guys highlighted low lights, margin uncertainty for me. I don't know what sort of profit margins they're going to have over the longterm. And then the fulfillment strategy is, is not something I like. So I guess I just don't like what they're doing with it. Cause it seems like they're just putting their

toe in. So they're saying they're going to spend a billion dollars a year on fulfillment. And just to me, that seems weak because Amazon is investing so much more Walmart too, I guess, and all the other third party ones are going to be investing so much more than this. What are they truly going to be able to offer that can compete from a delivery standpoint, stuff like that. I get a bit concerned in that regard. And they're still using third parties in that process. Yeah. So it's like, are you really going to create a vertically integrated strategy? Why invest only this amount of money instead of 5 billion a year, which maybe they don't have the room to do, but I guess that shows kind of the, maybe the economies of scale that Amazon has. I just don't

in general see what they're doing with fulfillment because what kind of benefits are you going to truly have if you still have to outsource a lot of the stuff and um what you might call it just pay people to deliver stuff it's just it's tougher yeah maybe it's maybe maybe it's more of a gradual uh process than we think it could be gradual but amazon's been doing it for what i know but they invest i don't have the numbers but they are going to invest this year more than shopify's plan to invest oh they're probably investing more in the second half of this year than Shopify is planning to invest over the next decade. Like, how is Shopify going to compete in that regard?

I just don't get it. All right, bull case. Brad, what's your bull case for Shopify? Yeah, mine is pretty simple. I'm just kind of reiterating the themes that have been covered already. Shopify needs to, or not Shopify needs to, but Shopify, the bull case is that they do a lot more for their customers than they currently do. So whether that's more efficient fulfillment and courier services,

that they're helping their customers conduct or that POS system that we're talking about, or maybe a broader dive into cross-border commerce. It's very interesting that they're partnered with Global E and kind of have a competing product. I didn't know that. But to me, just buy Global E and put it in your company. That makes sense.

But the bull cases, they do a lot more than they do today. Yeah. We also talked about, I think, in the past, buying Avalara. I think when we had an Avalara show back in the day, or like a year ago, we talked about like, Sean, if I could buy them the vertically integrate, it's tough. Yeah. It seems like there's a lot of opportunity to expand, but it's kind of tough to see what they're going to actually choose to do. All right, Ryan, what's your bull case? Well, I don't think it's going to be a phenomenal return if they're just maximizing the value on their existing customers. I think they

have to find a new way to add customers. And so Wix is a company that we know better. And they've said that they think, and this is going to probably prove to be wildly optimistic, that they think they could power 50% of all websites within five to seven years. It's new websites. All new websites within five to seven years. If that could be Shopify instead, I think that's sort of a $75 to $100 billion revenue opportunity if you're doing that. And if they're able to get to 20% to 30% free cashflow margins, you've probably got a solid return from there. But it's worth noting that the bull case today is way different than the bull case used to be. I think investors have to temper their expectations. The returns just, they can't be what they used to be.

77 times gross profit at almost $200 billion. Come on. I mean, what has the stock's compounded growth rate been? It's been a lot. A 10X from here seems unrealistic. Yeah. I mean, agreed. All right. Bold case for me. Let's just go through a little bit of numbers of what the price is kind of expecting. So if revenue grows a 30% CAGR for 10 years from here, that is $57.9 billion in annual revenue on a 20% free cashflow margin. I'm putting that as kind of a middle ground. I'm unsure whether it'd be higher or lower. Gross margin of 55%

indicates to me it's not going to be nearly as good as the best in class software companies out there like an Adobe or something like that with 40%. That seems unlikely. So if a 20% free cash flow margin on $57.9 billion in revenue is $11.6 billion in annual free cash flow versus $177 billion enterprise value, that tells me if you're buying Shopify today, your bull case needs to conclude that they deserve a premium multiple in the future yeah that that has to be a part of your bull case um all right brad you've done yours so bear case brad what do you think you go wrong here actually i have a question um so a question for both of you whoever wants to make it but to me it's like based on what we've talked about shopify is a very uh software-based company

and that they're just building websites predominantly for people. So it's confusing to me that their gross profit margin isn't more in line with an Adobe or more in line with a CrowdStrike or more in line, maybe like a ServiceNow or something like that. So I was curious if you guys had any feedback. Is that the POS funding that they're doing? But that's not that big of a part of the business. So if you guys have any thoughts. Yeah, so it's the payments part.

So when they do the payments, they have to pay the credit card companies and Visa and MasterCard. and what's the other one called? The Merchant Acquirer, I think. So the subscription solutions have higher gross margins and they are going to be closer to the best in class SaaS companies out there. But the merchant solutions will be lower. Somewhere around 40 to 43%.

Yeah, so unless they evade Visa and MasterCard and the payment networks, which seems very, very unlikely, especially in the short term, the margins of that are never going to expand uh, to much more. And if merchant solutions are the bigger part of the business and growing faster, they're always going to have a, uh, ceiling and gross margins. It's similar to square. Uh, when they had their seller stuff, it's similar to all sorts of payment companies

that are doing this. Uh, they're just going to have lower gross margins, which is why gross prop is probably the most important. Brad, I don't know, Brad, did that clear that up or? No. Yeah, for sure. Thank you for that. That, that cleared things up, um, 100%. So I'll, I'll move on to the bear case now, if that works. Um, but, but for, for bear case, for me, it's kind of just kind of polar opposite of the bull case. They don't become a lot more, or they don't, they don't provide a lot more than they currently do, um, for their customers. And, and, and yeah, uh, with,

with kind of some of the valuation metrics we've highlighted, they, that that needs to happen. It needs to be part of the plans. And, and for a company with, with management that for 11 plus years has just demonstrated how amazingly elite they are, they can pull it off, but the bar is very, very high. Yep. Ryan, what's your bear case? Well, you kind of talked about some of the numbers, so I'll talk about some as well. If they're able to get to $25 billion in free cash flow, and so that's about a 100x increase

from here, give or take, let's say they were at 25% free cash flow margins, they'd need $100 billion in revenue. So you can kind of back in the math. And I think they're only doing about $4 billion in revenue right now. Right. If they were able to do that, and then you put a sort of a big tech multiple on it, say, like Google free cash flow multiple, which I think is around probably mid-30s, maybe I'm going to peg it at 35, let's say, you've got a three-bagger from here, roughly. With no dilution. With no dilution. So that seems like a really rosy future.

um it's possible and you might just be betting on toby here and sort of his intuition and creativity and the team there that they can expand into new areas but it seems rosy and i don't think the reward justifies that so in a best case scenario the returns don't seem that great that's the bull case for me it's their case right the reward the reward isn't worth what you're paying today and if they don't hit that rosy future then you've got a problem yeah my bear case, I agree with both of you guys. So I'll try to hit something different. And it's just going to be plain old multiple compression. That is a risk here. That could be a bear case. I know we sound like a broken record. I mean, I'm sure I've said this with every company we talk about this. And

it's amazing to me that we talk about these every time we look at like a new IPO, we look at something like this, we look at a software company and we're like, gee, 60 times gross profit again. I have some thoughts on what that means for some of the broad market companies out there, but specifically for Shopify, I mean, if they dropped 80%, I wouldn't be like, wow, this is marketing. That's kind of like, I don't know. I mean, I, maybe I'd think about it. Yeah. There has to be a reason the company drops 80%, but I mean, what would that be? Okay. If they dropped, uh, okay. More than like 25 billion, 77 times trailing gross profit. If they, if that went down to 10 times trailing gross profit that's almost an 80 drop or maybe even more

that's more yeah it's more so i think that was a good investment at that point but maybe maybe who knows they have to continue the growth which is what i get hung up on you're betting on this growth it's like it's all you're like oh yeah they're guaranteed to grow 30 forever it's like are they okay i think they will continue to grow i don't think i think 30 is rosy for a, for a decade. Yeah. I mean, that's, that's optimistic. All right. It's more or less interesting. Let's wrap things up with our final thoughts, maybe on the stock, Brad, what are your final thoughts?

Yeah. So before we would probably all of us say less interested, let me just preface it with saying to the people holding the stock, congratulations, you've made a stupid amount of money and, and that, and, and that that's awesome. And, And the company has been an amazing investment for the last decade or since it went public in 2015, not a decade plus. But congratulations. Great job. Good. Yeah. Good job for me. Less interested. One hundred and eighty, whatever it is, billion dollar enterprise value and not. Yeah. And that's 70 times gross profit multiply just for a company to be this big and for me to want to invest in it.

It's got to have margins and cash flow like a Facebook or like a Microsoft. and this just doesn't. And it also has to have a multiple more similar to a Facebook and a Microsoft and this just doesn't. So congratulations to the shareholders. I'm going to keep staying on the sideline here. And there has to be a path to the margin expansion,

the margins, which for me, a big hang up for that for Shopify is that they're going to have that cost of revenue with payments. I am less interested. And I'll add that I know we always say like valuation matters, But if this was a $2 billion company, I wouldn't be so hung up on valuation.

If it's a $2 billion company and you know it's going to be a $10 billion company, it doesn't matter what you pay. No one knows, but you think there's a good chance. Right. Then maybe it doesn't matter as much. But this is a pretty premium valuation, and it's $180 billion. That's really hard to wrap my mind around as an investment. I don't think you're getting paid enough for the risk. Yeah.

Yeah. I mean, to me, it makes no sense. I've said this for a while. But it will always stay on my watch list because I think it's a remarkable business. Yeah. I think if anyone says that it's not a remarkable business, you're kidding yourself and you're not looking hard enough. I think everyone can agree it's a great business. And everyone does agree. That's why it's at such a high valuation. I mean, everyone agrees it's one of the best businesses out there. I don't care. I'm just less interested. Okay. If someone says, I know everyone that's in growth investing says, I don't care about valuation, but like we've said before, if you don't care about valuation, I will buy the shares

of Shopify and then I will sell them to you for 10 times the price I bought them for. Because if you don't care, then apparently any price will be good here. But that's what I'll say, less interested, the size matters here at 180 billion premium valuation that totally matters. I don't think the growth is just when are you going to generate the cashflow to make it for this market cap? I think it would take 40 years, maybe unless they totally turn into Amazon and capture the entire market, which seems like an absurd upside. I mean, it's a very competitive market. You got Wix, you got BigCommerce, you got all these other people. Amazon is still growing rapidly. Walmart and Target are making huge investments internationally. There's all the other ones,

MercadoLibre. I mean, gosh, there's a lot of competition out there. They're not going to win the whole thing well i don't want to i don't need to go on the rant here yeah that's interested amazing company uh we have stock for next week brad what is uh do you have one i hope did uh and what is it could we done have you guys done all birds yet no ryan loves it ryan's bought the shoes apparently we got another guy here brad that you know the shoes i happen to have two pairs of all birds in my closet. So I'm an expert on the company. All right. Let's do the company. We can be, uh, we're going to be tech bros and, uh, well, uh, you guys have to wear the shoes while we record. Okay. Fair enough. All right. All birds. That should be a fun one though. It's

an interesting business. Um, I don't even know. Do they have more than shoes now? I guess we'll get into it. All right. Well, more than socks. All right. They have socks now. Huge. That is huge. That's absolutely huge. All right. Let's wrap things up. That's going to do it. Remember we are not financial advisors. Anything we say on the show is not formal advice or rather recommendation. Dang it. I've had a good streak here. I'm not messing this up. Ryan and I are not financial advisors. Oh my gosh, I totally messed this up. Ryan and I are general partners at Arch Capital. Clients in Arch Capital may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. And if anyone, we've had a little

bit of audio trouble. Brad is actually on a hotspot right now. So we really, you know, This is a gritty episode. We had to kind of manufacture the zoo and make it work. We're going to get the Wi-Fi better and it's going to be smooth here out. I don't think it was a big issue, but if anyone is worried about that, we're going to get it fixed. Also, I'll add, if you want to get in touch with us, some people still do this. Some people do not. You can reach out to us at chitchatmoneypodcast at gmail.com. That's another way to reach us. Yep. And it's in every show notes. So you'll be able to see that there to get the spelling and all that stuff.

Thank you all for listening. We'll see you next time. This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Honeigans. Don't know the net?

Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder? I want Conrad dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland. New season hits September 18th on Paramount+.