The signs certainly point to a slow-down in growth for the e-commerce company, says research analyst Brooke Thackray of Horizons ETF Management Canada, but how many times have we seen Shopify doubters make the wrong call? Too many to count.
“Shopify has done extremely well. It’s been the Canadian darling and it actually was responsible for most of the performance of the TSX last year, which is quite incredible,” said Thackray, speaking on BNN Bloomberg on Monday.
“But in its recent earnings announcement it basically said, ‘Look, we had really strong results and we grew by around 79 per cent last year, but we can’t keep this up and we don’t expect to keep this up,” he said. “And with the reopening of the economy they would actually expect to see slower growth.”
Shopify announced its fourth quarter and 2020 year end numbers on February 17, showing a whopping 94-per-cent year-over-year increase in revenue to $977.7 million for the Q4 and another almost doubling of revenue for the full year, generating a 2020 top line of $2.929 billion compared to 2019’s $1.578 billion. Just as positive, SHOP’s Q4 had positive net income of $123.9 million compared to $771,000 a year earlier, while the full 2020 was also positive at $319.5 million compared to a loss of $124.8 million in 2019. (All figures in US dollars.)
“From the start of Black Friday in New Zealand through the end of Cyber Monday in California, sales on Shopify’s platform reached more than $5.1 billion,” Shopify said in its fourth quarter press release. “This compares with more than $2.9 billion in Gross Merchandise Volume (GMV) for the global Black Friday Cyber Monday period in 2019. Shopify also offset all carbon emissions from the delivery of every order placed on Shopify’s platform during the weekend, resulting in nearly 62,000 tonnes of carbon emissions offset.”
GMV, a count of the total dollar value of orders placed on SHOP’s platform, hit $41 billion for the Q4 and $120 billion for the year, both again near doubles year-over-year. The company saw expansion of services as well as the launch of a new Shopify POS, its Alipay payment method in the US, along with expansions of Shopify Payments to new countries and the rollout of Shopify Capital across the US, Canada and the UK. That’s on top of the further strengthening of Shopify’s own fulfillment network and expanding its warehouse, shipping and transportation grid.
“We are building a global commerce operating system that lowers the barrier to entry to entrepreneurship and provides our merchants with the tools they need to manage and scale their business across a number of channels,” Shopify said.
At the same time, the company’s outlook was muted, noting that a chunk of consumer spending which migrated online during the pandemic will head back to bricks-and-mortar as vaccines make public gathering safer. The end result will be a slow rate of growth in 2021, according to Shopify.
Thackray said that slowdown should at least give investors pause before buying SHOP.
“The pandemic actually helped them because everyone’s working from home and that really facilitated their business style, but with the reopening of economies we’ve moved somewhat back to normal,” Thackray said. “We may have less opportunities for Shopify to expand.”
“I know they came out with an investors’ day and talked about some expansion opportunities coming up, but overall, I think they have less opportunities as we mature in this pandemic on a go-forward basis,” he said.
“But the company has surprised everybody to the upside and continues to perform well. I think it’s okay at this point. Just recently as of last few weeks we’ve started to see SHOP underperforming the market — if it maintains that underperformance, I’d be looking to go elsewhere, as we may see a little bit of softness in the stock as the economy actually reopens,” Thackray said.
Shopify shareholders have had phenomenal success in recent years. For 2019, the stock increased in value by 184 per cent, while last year saw SHOP gain a further 178 per cent. So far in 2021, the stock is up 15 per cent, which compares to gains of five per cent for both the S&P/TSX Composite in Canada and for the tech-heavy NASDAQ in the US.
This past week, Shopify completed a huge equity raise, closing on a public offering of 1.18 million shares for proceeds of $1.551 billion. The company said it will use the funds to strengthen its balance sheet and fund its growth strategies. At the close of the 2020 year, SHOP had $6.39 billion in cash and equivalents compared with $2.46 billion at the end of 2019.
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Bullet points
Our main resource will be Shopify annual report (hereafter - AR) presented on the website of Shopify:
https://s27.q4cdn.com/572064924/files/doc_financials/2020/ar/40-F.pdf
I will refer to pages of it as AR p.xxx
Revenue: 2 of 3 bln. is coming from merchant solutions.
I don’t believe this figure for several reasons.
1) (AR p.101) In audit opinion it is stated that revenue recognition (Principal Vs Agent) was a subject to both management and audit judgement. If auditors were sure about correctness of revenue recognition, they wouldn’t mention it.
Link on contract with stripe
https://www.sec.gov/Archives/edgar/data/1594805/000119312515129273/d863202dex1011.htm
1) As I see, the whole responsibility and control over payments is on Stripe.
2) SHOP simply doesn’t have assets to process payments
3) Stripe can interact with SHOP customers without involvement of SHOP (if merchant purchases basic package). However, SHOP cannot render services without stripe.
As a result, it is more appropriate to treat SHOP as an agent, rather than Stripe.
2) WIX, competitor of SHOPIFY, has similar number of live websites but has 10 times less revenue from merchant solutions (they call it business) than SHOPIFY. This figure looks much more correct to me since I think that both WIX and SHOPIFY are agents with respect of merchant solutions.
Financial statements of WIX are:
https://sec.report/Document/0001178913-21-001179/
3) (ARp.102) Balance sheet. Despite have that SHOP has more sales than WIX, the deferred revenue balance of SHOPIFY is less than WIX’s.
Maybe WIX is receiving fees more in advance than SHOPIFY, but SHOPIFY has a ratio of amount of deferred revenue to revenue equal to 1 to 27. Meaning that it asks to pay fees more often than every 2 weeks. This is very unlikely since the standard period is minimum one month.
4) Revenue does not match possible amount of all transactions.
Let’s make assumptions that lead to minimum figure. Let’s make an assumption that there are 1.4 million live websites now. Let’s make an assumption that those websites are owned by average American-Canadian resident. Average salary is 30k per year. This is the opportunity cost of profit from owning a webstore. Let’s make an assumption that profit margin of average web store is 20%. According to this assumptions the amount of sales done through Shopify is:
( 1.4m stores * 30k profit ) / 20% = 210 bln. USD. It is 50% of all imports from China to USA in a year. How is it possible? I think it is not possible. I think that 90% of all sales done though Shopify are parts of different Ponzi schemes.
* average salary was in assumption because we exclude big brands like Sephora using Shopify at the same time excluding citizens with lower income.
Sales and marketing costs.
(AR p.103) Since I don’t believe in revenue figure, I will refer to gross profit. It is 1.5 bln. For this gross profit SHOPIFY spends 602 mln. on sales and marketing. That means one dollar spent on ads gives only 2.56 dollars of gross profit. This number is very low and indicates that SHOPIFY is not such a good or mass product. Reminder, company exists for 17 years.
Research and development
(AR p.103) SHOPIFY spends hundreds of millions on research and development. But we don’t see any increase in intangible assets or PPE. Why a company that uses creative accounting to show good sales is not using it to capitalize R&D expenses and show higher profit? In my opinion, because those expenses aren't R&D but Cost of sales. Recently companies started to use creative accounting to reclass COGS to R&D and show better gross profit margin. The most recent example is Plug power.
Unrealized gain on equity and other investments
Despite all the manipulations P&L still does not look good. We have 90 million income from operations from a company with >100 bln. market cap.
To show a better picture SHOPIFY decided to find another source of income – revaluation of purchased assets – 135 million. It is 150% of income from operations. (AR p.120) They received investment in Affirm in July and measured it low. In September they revalued it and got 133 million profit. Both evaluations were done in the same quarter. They have created a profit out of thin air.
If we exclude this profit from EPS calculation it will fall to 1.56 and PE ratio will become 700.
Cash
I don’t believe in cash figure either. (AR p.118) The cash consists mostly of commercial papers and bonds. It is hard to audit, you can't just send confirmation request to the bank and receive a reliable evidence. You perform physical examination of those documents. They can be forged, they can be borrowed.
And statement of cashflows (AR.p105) shows that there is a consistent outflow of cash from trading marketable securities.
Dropshipping
In my opinion dropshipping became a Ponzi scheme in the last a couple of years. People purchase from one store that purchases from another and so on. One sale can go through up to 10 stores on its way from consumer to producer. It is in internet environment where most producers have their own websites. SHOPIFY relies heavily on dropshippers and when pyramids will fail, I expect that SHOPIFY will suffer. I am not sure if SHOPIFY is involved or it is just used. Its provides very good instrument for pyramid schemes where merchants can easily make fake sales though creating fake orders and marking them as paid orders.
Public offering
In order to conceal fraud and provide liquidity to Business Shopify constantly does public offering. Every 4-6 months. I expect the new secondary offering in June 2021. Without it Shopify can’t hide fraud.