We can’t step away from the marijuana hype for too long, I guess — the newsletter marketing world is still awash in the skunk weed, as they have been around every election cycle over the past several years… and the firing of the marijuana sector’s favorite villain, Attorney General Jeff Sessions, will probably only serve to double the flow of pot pitches.
Most of the marijuana teasers this year have focused on the Canadian pot stocks, since those were and are the only large and fully legal pot-focused companies (outside of pharmaceuticals), and the Motley Fool went so far as to launch its own marijuana advisory a few months ago and tease one of those as “Tom Gardner’s favorite,” (that was Namaste, if you don’t remember — we covered it last month)… but now they’re out with the first marijuana teaser pitch for their regular ol’ newsletter (Motley Fool Stock Advisor), so we’ll cover that for you. Or uncover it, I guess.
Here’s how the ad launches:
“A little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.
“And make no mistake – it is coming. To the tune of an estimated $50 billion….
“Legal marijuana was worth $10 billion for the U.S. in 2017 alone. And since experts have projected the U.S. industry to skyrocket to $50 billion by 2026, it’s time for investors to start paying attention.”
And then the tease…
“… we’ve been quiet on this growing marijuana industry for a while.
“Because a game-changing deal just went down between the Ontario government and a powerhouse Canadian company.
“And that company – which now has the opportunity to rake in profits from the $7 billion Canadian cannabis industry AND potentially the $50 billion US cannabis industry – is no stranger to us here at The Motley Fool.”
They say that this is a stock they’ve recommended before, so perhaps it’ll be one we’ve covered in the past… and they drop a few specific clues that we can feed to the Thinkolator for you… clues like:
“409% returns since our July 2016 recommendation
“86% sales growth last quarter alone…
“locked in key partnerships with behemoths like Facebook, Amazon, and now the Ontario government….
“… the company’s CEO (who has a $1.3 billion stake!) declared that he thinks they’re only 2-3% into what this company could eventually become.”
They also say that the company is not dependent on marijuana — apparently they’d still be A-OK even if the genie gets crammed back into the bottle and marijuana is banned forevermore, but they’re clearly excited about the pot potential for this particular pick.
And… well, that’s about it for clues. Ready for answers? This is our old friend Shopify (SHOP), which has been teased before for its somewhat tenuous connections to the marijuana industry — Shopify sells services and software for ecommerce, and they do indeed provide the hosting and online shop software for several of the big vendors of marijuana in Canada, including, critically, the Ontario government. The 86% sales growth was not for “last quarter,” but they have had growth at that scale in quarters past (it was around 55% last quarter, a number that’s been gradually trending down as they grow from a bigger and bigger base each quarter).
Several Canadian provinces, including Ontario, BC and Newfoundland, are selling online only through government-owned portals… and Ontario’s privately licensed pot retailers won’t be open and ready for at least a few months, so folks in Toronto or elsewhere in Canada’s most populous province have to buy their marijuana online through a Shopify store if they want to buy legally in these first few months… something they’ve been eager to do, according to local reports. Ecommerce is expected to be a pretty major part of the marijuana business in Canada otherwise, too, including in provinces where the government is licensing shops instead of operating retail stores themselves, and Shopify, as Canada’s tech champion these days and the highest-profile (and arguably easiest to use) ecommerce enabler, is likely to get a lot of that business.
But, still, it’s important to highlight that “this company is not dependent on marijuana” bit — mostly because we should make clear that Shopify will also probably not benefit that much from marijuana.
It’s not really clear what the sales picture will be in the long run, mostly because all the estimates for online pot sales in Canada are wild guesses, but Shopify CEO Tobias Lutke did reportedly tell Bloomberg that they’ve structured their contracts to “capture the upside” of marijuana sales volume, but we don’t really know what the specifics are in those contracts — most Shopify customers pay a monthly fee for the software ($29/mo for basic, up to $299/mo for advanced) and either use Shopify’s payment processing services, which have another fee embedded, or pay 1-2% of transactions as a fee for use of the platform, but larger “Shopify Plus” contracts for substantial businesses are individually negotiated.
If Ontario’s marijuana ecommerce operation generates $500 million in gross merchandise volume in a year, for example (that’s probably high, just an example), that would mean Shopify’s revenue from that business would probably be in the $5-10 million neighborhood… maybe a bit more if they really do have some special deal with the pot companies and provinces. That’s meaningful, but it’s not likely to drive the company’s results anytime soon — Shopify processes about $10 billion a quarter in sales for merchants right now, and has almost a billion dollars in annual sales itself (mostly from those fees and software subscription charges), so it would take a lot for one segment, even a potentially big one like marijuana, to move the needle dramatically.
They do have some advantages — they spent some effort on providing a product that would work for pot sellers, and it’s a cloud-based offering that can be tweaked quickly to comply with regulatory changes… and they also have gone a long way toward providing “internationalized” versions of Shopify in other countries, so perhaps they’ll even make some headway as European countries begin to follow Canada’s lead in legalization.
So is it possible that pot will mean big things for Shopify? I guess, but it depends what you mean by “big” — I’d be surprised if this impacts Shopify’s revenues by more than 5%, and it’s hard to gauge the impact of that for a company that’s already growing revenues by 50% a year.
We haven’t seen sales numbers from Ontario, which is expected to be the big driver, and lot of the private retailers aren’t online yet (Shopify also has deals with Canopy Growth and some of the other big companies that are expected to do a lot of direct retail in provinces where that’s allowed), but if we guess that marijuana really is a $10 billion retail market in Canada next year, and Shopify stores get 25% of that market, then yes, it could be a meaningful boost to Shopify’s sales — Shopify customers sold $10 billion in GMV last quarter, which was a 55% boost from the prior year, and last year’s fourth quarter was at $9 billion, so if we assume that trend continues we could be looking at something in the neighborhood of $45-55 billion in GMV next year for Shopify merchants. $2.5 billion from marijuana e-commerce would be about 5% of that, and I’m skeptical that we get that far… but Shopify has been growing so fast that gross merchandise volume will almost certainly be at least 30% higher next year than this year, so what portion of that is from pot doesn’t really matter so much.
Shopify has been a pretty volatile stock this year, I own shares and have just let it bounce around as it has stayed in a range and hasn’t tripped my stop loss triggers, and I remain very impressed with management and with their very ambitious goals and their focus on investing in a great product and aggressive growth to dominate their sector. They’ve created a great and easy platform for retailers, and no one else does it as well — they’ve even outdone Amazon, which is saying something, so the latest announcement from Amazon that they’d be focusing more on marketplace services didn’t really faze Shopify investors much. (Shopify facilitates selling through lots of platforms, including Facebook and Amazon, so to some degree they’re also partners with the big guys).
So it’s a great company, I’m really impressed by them… but it’s also crazy expensive, which continues to attract short sellers who see an easy path to knock the shares down a few notches (Citron was a very vocal short over the past year, and other have jumped in and out — about 11% of the float is now sold short). SHOP currently trades at about 200X next year’s forecasted earnings, and they have not been at all focused on generating earnings in the past so they could also decide to reinvest more in growth, even if that means disappointing earnings-focused investors — they do emulate Amazon a bit, particularly when it comes to keeping the long view and talking about building a dominant business at the cost of current profits.
Still, they are now profitable, just barely, and that means earnings growth will probably be remarkably high for a while (going from 10 cents to a dollar is much faster growth than going from one dollar to two dollars)… and if you use 2020 numbers instead of 2019, well, the forward PE is only 100 instead of 200. So that’s something. I last added to my Shopify position during the 20% drop that the shares saw following the August earnings report, but I’ve kept it a fairly small position because of the inherent risk of this lofty valuation — the shares are within a few percent of my last buy now, though there’s been a lot of bouncing around inbetween (the October swoon that hit all the premium-priced tech stocks hard, followed by their solid third quarter report two weeks ago that helped to stop the bleeding)… so since I most recently bought a bit at prices in the low $140s, the most honest answer that I can give is that I think it’s appealing, but would be nervous risking more than 1-2% of my portfolio on this particular stock. Pot or no pot.
What matters, of course, is what you think — it’s your money after all. Feel like a toke of SHOP fits your portfolio? Expect bigger things for marijuana, or international expansion, or whatever? Or do you sympathize with the short sellers who think I’m crazy to pay 15X sales for this stock? Either way, please let us know with a comment below.
Disclosure: I own shares of Shopify, Facebook and Amazon among the stocks mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s rules.