Motley Fool Money - Shopify’s Comeback Story

Episode Date: November 12, 2024

The e-commerce giant is proving that growth can forgive past valuation sins. (00:26) Jim Gillies and Ricky Mulvey discuss: - Why investors are cheering Shopify’s latest results. - An automotive supplier that can provide a ballast for portfolios. - Why excitement about the market right now isn’t quite a mania. Then, (16:24) Alison Southwick and Robert Brokamp answer listener questions about allocation, gifting to kids, and ETFs with downside protection. Got a question for the show? Email us at [e-mail]. Companies/tickers discussed: SHOP, ALV, RCL Visit our sponsor at www.public.com/motleyfool Host: Ricky Mulvey Guests: Jim Gillies, Alison Southwick, Robert Brokamp Engineer: Rick Engdahl Public.com disclosure: A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got news on one stock. probably know in one you probably don't you're listening to motley full money i'm rickie molly joined today by jim gillies jims how's everything in the great white north uh it's still relatively warm to be honest with you it's uh not bad but uh you look outside you can see the frost coming before we get to the main event the main event of today's show is the world's largest automotive safety supplier let's hit let's let's let's hit uh the small canadian tech company shopify And you know what, Jim, you always like these stocks that nobody has heard of because that's where you go find value. You know what? I'm pretty happy to own a stock that everybody's heard of today. Shopify up about 25% beat gross merchandise volume projections.

The amount of stuff going through its system by about $2 billion. Total number for that, $70 billion. Revenue has grown 26%. We also got some commentary from Shopify president Harvey Finkelstein about just how the company is helping its merchants with taxes. How wonderful. What are your highlights from the quarter. Well, sure. If I can, if I can ruin, if I can reply to your mocking with my own mocking, you can do whatever you want. This is your time to speak. Well, you know, when I found Shopify, no one had ever heard of it. Right? We had it. We, we, I remember Tom Gardner was up in Canada in the summer of 2016 and Ian Butler and I said, hey, let's introduce you to something. And we never, never would have expected it worked out this well. But when I bought Shopify personally, and we recommended it in the now closed pro-Canada.

We recommended it in Stock Advisor Canada, which is still going. Our cost basis is under $4 Canadian a share. So it was a small cap when we recommended it. And I think there's a really interesting story to tell here from going from the unknown to the everybody tripping over themselves to own it to despair and rebirth kind of thing. So let's see if we can tell all of this. This was a great quarter.

It's shocking how great this quarter given if you look at where the world has been. So basically, yeah, free cash flow margin, 19.5% this quarter when we wrecked it originally, free cash flow was just a glimmer in Toby Lukie's eyes. Even if you go back two years ago, free cash flow margin was humming along in the 5 to 6% range. now on a four quarters trailing basis, it's 17.4%. A year ago on a trailing four quarter basis, it was 7.8%. And this is kind of always what we were expecting. Not specific numbers, but when we recommended it,

and it was not cheap when we recommended it. I think we took out billboards in Central Park basically saying, look, the valuation is frothy. It's trading at a, wait for it, Ridiculous 10-time sales. Ridiculous. And as you know, I hate price or enterprise value to sales multiples because last I checked, most companies have some sort of expenses. And I prefer, much prefer an earnings or a free cash flow or other types of probability metrics. But our thinking at the time was, look, these guys enable small and medium-sized businesses and a few large

businesses to run their business online and present. And it's all kinds of little merchants. and whatever, but large and small as well. And the question really boiled down to how many small and medium-sized businesses can there be in the world looking for e-commerce? And I submit to you the correct answer is more. There'll always be more. There's always opportunity. So we kind of looked at the potential here, the growth potential, and said, you know what, sometimes I'm willing to pay up for growth because growth forgives a lot of sins. Now, again, that was roughly at 10 times sales. At its peak in 2021, it got to 70 times sales. There's no rational justification ever for something 70 times sales. People paying 50 to 100 times sales for certain companies today,

you should probably take a look at the stock chart that Shopify threw up because even today, after this fantastic rebound and after, frankly, what's been about two and a half years of just steady grinding. It actually went, Shopify in 2022 got back to 10 times sales, which is hilarious, right? We went from 10 times sales to 70, went back to 10. Now you're at about 16 and a half after the earnings report last night or this morning. It's a very different company. They are printing cash. You already mentioned the growth and revenues, growth and gross merchandise volume. they're forecasting things that look pretty rosy, at least for the near term going forward. And, you know, I think that, you know, it's okay. And I'm going to shock a few people. I think it's okay to pay 10 to 15 times sales for this type of growth profile.

You just have to say, I'm a long-term investor. Company still needs to perform because that's the other. look, if you paid 70 times sales at Shopify's peak in 2021, okay? You are still down about 30%. But 30% is better than 90%, like a few other companies from that era I could mention, where investors seem to be willing to pay any price for stock. And the growth did not emerge at the underlying company. Even though from the post-COVID bubble peak of 70-time sales down to today, again, share price is only off by about 30%, but the multiple has contracted from 70 to, as I said, 16 and a half. So I think that, you know, like when you're buying a growth story, you have to hope like hell that the growth does, in fact, emerge.

And with Shopify, it did. They had a couple little stumbles along the way. But so far, the last five to six quarters look pretty good. Cash flow, like I said, is expanding. And the answer to how many businesses can they help enable online still remains more. And even on a discounted cash flow basis, which you can now value Shopify at, which you couldn't back in 2016 when we bought it the first time. You know, it's not that. You know, I've got a reasonable DCF.

It's overvalued today. But it's not as bad as you might think. I can make a reasonably conservative case for $75 to $80 a share. And it's what at $112, I think, this morning? So there are worse things to have than just be a long-term shareholder of Shopify. Again, know the ride you're signing up for. If you bought your shares, put them away, look at them every couple of years. But I think it's been pretty good.

So you just used price to sales a lot for a company that's generating free cash flow. Oh, I did. Once the company is worth talking. I said discounted cash flow. I said discounted cash flow. And then you're talking about software companies with 70 times sales going to 16 times sales. You talked about how much you hated the price to sales multiple. And then you just used it like five times.

Now that this company is maturing, the cash flow for the quarter grew about 50%. That's what happens when you make your margins better. And that's what happens when you grow revenue. So how are you thinking about the company's valuation? What should retail investors that, you know, or excited about the company, seeing what's going on, but maybe haven't socked away those shares for a three to five year period. What are the metrics they should be looking at for Shopify?

I just, is the growth continuing? Always watch GMV and gross merchandise volume flowing through their system. Watch revenue, watch cash flow. It's not really any more complicated than that. Because again, this is like this is an overvalued company today, But it's not that overvalued, to be honest with you. At least it's overvalued, in my opinion. But it's not bad.

And I could tweak a few growth metrics in my DCF and probably get pretty close to today's share price. So I still think this is a company that you buy in thirds. I think you want to have some kind of a touchstone for it. When buy in thirds, I just simply mean just buy a little bit. And, you know, another opportunity shows up later, buy a little bit more, buy a little bit more. I think I bought it three or four times personally. There are fools who have probably bought it 10 times that many times than I have, and God bless. But just be aware, just keep one eye on the valuation. But when you do have a truly long-term double-digit growth story,

I think you can afford to be a little less price sensitive than I usually am, which is, which I'm pretty, which is Samson. Yeah, which is Sam. Yeah, no. But I mean, like, I'm not buying this one today, but I'm also not selling. We'll put it that way. Let's move to AutoLiv, the main event of today's show. This is the leading supplier of seatbelts and airbags. Yesterday, the company announced that it would raise its dividend by 3% and extended share repurchase program. So far, it's taken 11% of shares off the market since 2021. Jim, this is when we leave the listeners aside. If you're excited about a capital allocation story, you have my attention. This is a company that, Absolutely passes the David Gardner snap test, supplying 50% of vehicles with airbags.

But tell me, why is this a capital allocation story that you're interested in for this company making seatbelts and airbags? Sure. So I've owned this one personally. I think I bought it the first time in 2006. I added significantly in 2008. You might have noticed something was going on in the world in late 2008. Something about a global financial crisis or something. I don't know. And the stock had a weird near-death experience there. I'll explain why in a moment. So I had owned it before that. And it was just a, the thesis is basically quality company, making a decent amount of cash flow,

using that cash flow intelligently in the service of shareholders. So dividends, buybacks, maintaining a reasonable leverage profile, probably going to do 10, 15% annualized returns at that point. We run into 2008, and the stock dropped like a rock. I think it was $64 in the summer of 2008. And by Christmas of 2008, it was 12. And that's when I learned. I had a good learning from that environment.

And that is just because something says long-term debt on the balance sheet doesn't necessarily mean it's long-term debt. They had a couple, they've been financing themselves with some commercial paper. facilities, which were long-term facilities. They had four or five years left to run on them, but you had to roll the commercial paper every six months, which effectively made them short-term debt. And given that the financial world was imploding at that time, it looked like they might not be able to refinance their short-term, not long-term debts. So they managed to do a new financing. It was expensive at the time, but it kept the company back on track. And that's when I added

significant amount, should have bought the preferred shares they sold at that point in time, that it sounds going to have been retired. That would have been a smarter play. But anyway, and I like to think they learned a little bit too. So the near-death experience will not be repeated. The debt they have is reasonably good. And my look at this is, look, this is a company that is absolutely necessary. You talk about it passing the David G Smart snap test. Absolutely. The auto world is in a bit of flux. We're obviously have electric vehicles kicking around. We have plug-in hybrid electric vehicles, which I would like to call a cheat code because they're fantastic, but a lot of people don't really know them or are a little skeptical of them. I have two, so I'm not an unbiased audience. But even as the transition goes from ICE vehicles to PHAVs to B-EVs and whatever, they're all going to need airbags and they're all going to need seat belts and that's what Autolib does. And as you say, they're basically 50% of the market. So it has been a really good run since 2008. The stock's roughly a 10 bagger if you include a spinoff of the Viener subset, which is then taken out as well, I think by private equity and then carved up for parts.

Subsequent to that, but you've got about $25 and changed dividends since the credit crisis well more than the share price you paid at that time. So that's another reason I still hold it. I was dumb enough to buy it in a taxable account, so I'd get a hell of a tax bill if I sold it today. But also, too, I look at Autoliv as kind of a ballast type stock. They're not going anywhere. This is a critically important company in the car space. And I would hazard a guess that even if you ever got full self-driving vehicles or autonomous driving. And then by the way, the Viener spin-off that they did in 2018, that was their autonomous driving sensor division. And they sold it off. So that might tell you what they thought of the potential at that time. But even autonomous vehicles, I suspect are still going to have seatbelts. I suspect are still going to have airbags. Might be even more important to have airbags in those cars.

These guys are here for the long term. I look at them and I call this ballast for my portfolio. I'm expecting a total return dividend plus share price appreciation from here in the 10% range. Some years will be more, some years will be less. But I'm willing to bet with my own money that 10 years from now will come back. And the annualized return from here will be 10 to 12%. And that's fine. Not everything needs to be growth stock gladatorial games, right?

This is a, and it's still run by smart people who make a lot of cash, who are doing intelligent things with that cash. Only at a difference from the credit crisis era is they don't have that ticking time bomb of short-term financing that's masquerading as long-term financing. And I like that. Do you think we're back in, as we close out here, maybe a little mindset thing, I just get the feeling we're back in a little growth stock mania. Maybe not quite like late 20, 21, but it feels like we're getting back in a mania. And I remember asking you at the beginning of the year, are we in a mania?

And is that meaningful for investors? And you're like, eh, there might be a little froth, but we're not in a mania. I'll ask you again in November. Are we in a mania? There's more froth. I'm still not sure I'd call it mania. I think there are pockets of mania. certain companies trading north of 50 times sales that I would argue most people who own them

have no idea what they do or how they make money. I would consider that a mania. But I mean, like, in 2021, by the end of 2021, I was openly calling it tech bubble two electric boogaloo. Like, I was just like, if history has shown us anything, Ricky, it's that some people just have to learn a lesson. They can learn no other way. And I think that's kind of what 2021 did.

But I don't think, I think there's a lot of, I think there's a lot of fairly richly priced companies out there right now. But I'm still finding lots of opportunity for adding different stocks and the services I run or contribute to. You know, it's not as bad as 2021. When it is, I won't be shy about saying it. We'll put it that way. All right. Jim Gillies, thanks for being here. Appreciate your time and your insight.

Thank you. All right. Up next, Allison Southwick and Robert Brokamp answer, your questions about gifting to kids, ETFs, and allocation close to retirement. If you've got a question for the show, email us at Podcasts at Fool.com. That is Podcasts

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The Range Rover event is on now. Explore enhance offers at Rangerover.com. Our first question comes from Nick. My question deals with when to cash out my gains and not risk what I've made. I'm a firm believer that any stock I buy I plan to keep for five to ten years, and I was lucky and bought 200 shares of Royal Caribbean for $39 a share during the pandemic. Now it is at $234 a share. I would be happy selling, but I also don't want to leave more gains on the table since their sales still appear strong. What general advice do you have on when to get out and take the win versus staying in too long and risking a drop? Well, Nick, congrats on making that very successful investment. And unfortunately, I don't have an opinion about Royal Caribbean stock, so I can't help you there.

But there are plenty of ways to think about when to sell. So let's talk through them. First off, it always starts with your time frame. If you need this money in the next three to five years, it makes sense to sell a good portion of that investment and keep it safe in cash or short-term bonds. Secondly, how does it fit into your overall allocation? Some general rules of thumb that we've talked about in the past is that once an investment becomes more than 10% of your portfolio or it's part of a sector or industry that is say maybe

30% of your portfolio, you might want to pair it back a bit. And those are just general guidelines, but they highlight when investment should perhaps bear a little bit more scrutiny. You can also think in terms of how much a stock shares the same types of risks as others in your portfolio. So Royal Caribbean is a company that is very sensitive to the overall economy, right? If and when a recession occurs, fewer people take cruises. So is your portfolio full of stocks like that? Or do you have a good mix of companies that are, you know, consumer staples or others that hold up maybe a little bit better during downtimes? And then, of course, there's your assessment of the company itself. And it sounds like you think Royal Caribbean still

has potential, that's great, but definitely do some more research. Look for opinions from other investors and analysts. See if there's anything you're missing, both good and bad, right? There's always the question of valuation. And I would say among the analysts here at the Motley Fool, we have a range of opinions about how much valuation matters. Some include it as just a factor to consider. Others pretty much ignore it altogether, but Royal Caribbean stock has a PE in the high 20s, so I wouldn't say it's exactly cheap. And then as I often say, a good question to ask about every investment you own is, if you didn't already own it, would you buy it today? If the answer is no, then maybe that suggests you should cut it back a bit, especially if it's

an IRA and there are no tax consequences. Which gets me to my final point. This isn't an either or decision, right? You can take some profits, especially if there are other investments that you think are more promising, but still keep an investment in the company, right? This is what I often call the regret minimization strategy by selling. some shares while still holding some, you'll feel partially good, whatever happens. Our next question comes from Paul. Hi, Allison and bro. You two rock. Well, Paul, you are a discerning man with excellent taste in people. All right. If only our political leaders would earn trust and approval ratings like yours, we'd live in a better world. Well, I don't know

about that. Allison for president, that's all. Yeah, no, thank you. If I help pay off my kids, student loans, are those considered gifts and subject to annual and lifetime limitations? If yes, is there a smart legal way to avoid such limitations? When the kids were in college and I paid much of their tuition and fees, I never considered those payments as potential gifts. So, Paul, the quick answer is yes. It would be considered a gift and subject to the annual and lifetime limitations if you help them pay off their loans. And those limitations in 2024 are $18,000 from one person to another person. So if you're married, you could each give $18,000. And if you give more than that, you have to file form 709. But that doesn't mean your little taxes.

You'll just eat into your lifetime annual gift and estate exemption of $13.6 million per person. So twice that if you're married. That's this year. And by the way, those numbers are going up in 2025. there'll be $19,000 for the gift per person to recipient in 2025 and 13.99 million for the lifetime gift in a state exclusion. So basically, most people really don't have to worry about paying gift taxes. Now, your payments for your kids' college tuition likely wasn't considered a gift. That's because there are no limits on the amount you can pay for the education or medical expenses on behalf of someone else as long as it's paid directly to the provider. So if you send a check to a college or to a hospital on behalf of someone else, you don't have to report it.

But if you instead gave money to someone and then they sent that money to a college or hospital, it would be subject to all those aforementioned limitations. All right. Our next question comes from Marianne. What do you think of these ETFs that offer 100% downside risk protection? Yes, they limit your upside. But if you just want to make something closer to a market return and more than what bonds can typically offer, could these be a good option? So, these are a relatively new breed of ETFs, but the underlying strategy isn't new. What these ETFs do is they use options to create basically a limited range of possibilities that's basically dictated by the performance of an index, most commonly the S&P 500, but it's also based on the Dow or the NASDAQ or the Russell 2000. So for example, the issuer may say that if you buy this ETF, the return from, say, December

1st of this year to December 1st of next year, will track. the price return of the S&P 500, but you can't earn more than 8%. And if the market goes down over that period, you'll get 100% buffer against any losses before fees. So in times like now, when the S&P 500 is up over 30% over the past 12 months, you'd be earning a return that is just in the high single digits. Now, you can choose ETFs that have higher caps, but with lower buffers. So you have higher potential upside, but you may actually lose some money if the market goes

down, but generally not as much as the overall market. I should point out that when the return of the index is calculated to determine the return of the ETFs, dividends are included. So that knocks off about 2 percent from there. Now, to get these stated guarantees, you pretty much have to buy the ETF right after it's issued, and you have to hold it for the designated term, which can be anywhere from six months to a couple of years, though most of these are issued with one-year terms. And those guarantees are before the fees and the fees on these ETFs somewhere arranged.

between 0.7% to 0.9%, so a little under 1%. The issuers of these E.Fs often provide information on their website. That will let you know the range of returns you might get if you say bought one of these ETFs four months after it was issued. And then once the term ends, the ETF company will set new guarantees regarding the upside and downside limits basically based on the pricing in the options market and interest rates at that time. And then you as an investor can decide to just go.

roll it into the next term or cash out. The bottom line for me is that these are actually are kind of intriguing. I can see how they could be appropriate for people who are near or in retirement and once, you know, as they say, some of the upside of the stock market, but they want to limit the downside. But over the long term, they'll likely underperform the stock market, you know, assuming the future looks mostly like the past. If you also find these intriguing to learn more and see what's available, visit the websites of two of the biggest providers, providers of these ETFs, First Trust and Innovator ETFs. Next question comes from, just a fool. That's what they put. I'm not calling them names.

I have a 401k, an unallocated IRA, and a brokerage account that is 99% in stocks. I want to allocate some of the IRA to ETFs and or dividend stocks. I'm six years from official retirement. Are stock prices too high? Should I wait? Oh, bro. Can you predict the future for us? Please. Yes. That's exactly. Exactly, I'm here, yes. And I will tell you 100% guaranteed that the stock of market will either go up or down. How's that for you? It's about as much as I can hope for.

Anyways, just a fool. At six years before retirement, you're pretty much in what they call the retirement red zone, which also includes the first several years of retirement. And the retirement red zone is a time when a significant bear market can have a huge impact on your retirement plans, right? If there's a bare market in your 30 years from retirement, no big deal. But if it happens right before retirement or right after retirement, it can be a pretty big deal. So if you're six years from retirement, it really is a time to be playing it safe with at least a portion of your portfolio.

At the very least, building up the amount you have in cash and bonds to pay for your first five years worth of portfolio provided income and retirement, we often call the income cushion. And maybe you've already begun doing that in your 401K. But if not, then I would factor that into how much you want to invest your IRA in the stock market. You said it's allocated. I assume that means it's in cash. So, you know, if you haven't done that in your 401K, you might want to play it safer with your IRA. That said, if you enter retirement with different types of accounts, most analyses indicate that it's probably best to take withdraws from your taxable broker's account first and then tap your IRA or 401K. Just a general rule of thumb, everyone's situation is different, but you might want to start

building up some cash in your brokerage account by not reinvesting dividends and perhaps strategically, gradually selling stocks that you think have reached their peak potential. I do think that it makes sense for those who are near in retirement to have a diversified collection of dividend paying stocks or ETFs to focus on them because dividends are more consistent and predictable in stock prices. You know you're going to get cash every year, every quarter, and that allows you to gradually build up that stash of safer assets or, you know, give you money to spend in retirement. If you're looking for some ideas in terms of ETS, here are three that I own, the Vanguard

dividend depreciation ETF, Ticker VIG, the Vanguard high dividend yield ETF, VYM, and the pro shares, S&P 500 dividend aristocrats, ETF, Ticker, and OBL. And the aristocrats are basically companies that have grown their dividends for at least 25 consecutive years. And finally, you asked whether stock prices are too high. I would just say they are definitely high. By some measures, the S&B 500 is trading at the highest valuation since the dot-com days of the early 2000s.

For long-term investors, it's generally best to just keep holding on, right? The SAB 500 reached over 1,500 right before the dot-com crash. And today, it's over 6,000. And that doesn't even include all the dividends you received over those years. But for people who are in the retirement red zone, close to retirement, just retired, I would say it definitely makes sense to play it safe with a sizable portion of your portfolio. Our next question comes from Elena. I've heard you recommend working with a financial advisor.

Is it a good idea to hire a financial coach when you're just getting started, budgeting, investing, and saving? Well, Elena, I see financial coaches as sort of like the personal trainers for your money. They can be very helpful with providing education, getting you set up, maybe building a budgeting system, introducing into other financial tools. There's all kinds of financial tools out there. Maybe you don't know which one is best, and a financial coach probably has some good opinions. They can also be basically accountability partners. They help you stay on track, maybe encourage you and troubleshoot issues if you come across any challenges. But it does

depend on whether you have a good one. And this is not a regulated industry. Really, anyone can call themselves a financial coach. Fortunately, there is a certification offered by the Association for Financial Counseling and Planning Education. So you might want to look for someone with the accredited financial counselor designation as a start. Then be very clear what you're looking for and make sure that the service that this person provides is part of the deal. I would say definitely get it in writing or through some sort of agreement, engagement letter or something like that. I would say that a financial coach is best for someone looking for help with budgeting,

more foundational money management, maybe paying down debt unless the coach has other certifications or licenses. They really shouldn't be providing detailed advice about investing, tax planning, estate planning, things like that. While coaches are cheaper than your typical fee on the financial planner, they're not cheap. Coaches charge between $100 and $300 an hour. But, you know, if that sets you up on the path for better financial success, I think it would be a really good investment. But before you spend the money, you might see what's already available to you through your employer.

These days, many companies have financial wellness programs that offer some sort of coaching or an employee assistance program that have some sort of a financial component. your 401k provider might also offer access to someone that they might call a financial counselor. So you might be able to get some level of financial coaching. As always, people on the program may have interests in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So buy or sell stocks based solely on what you hear. All personal finance content follows Motleyful editorial standards and are not approved by advertisers.

The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.