I may have to add a little dose of guessing to the Thinkolator results on this one, but we’ve had a few folks asking “who beat Amazon?” of late, thanks to this latest Motley Fool ad, so I’m going to give it a try.
The ad is for the Motley Fool’s flagship Stock Advisor service, which features a pick from each of the Gardner brothers each month and has had a strong long-term performance (but also holds sometimes hundreds of stocks and almost never sells, and a lot of that strong performance comes from a handful of 1,000%+ long-term winners like Netflix and Priceline).
And the ad hints at a recent pick by Tom Gardner, who tends usually to be the more “value” oriented part of the due (his brother David is the one who generally picks the “rule breaking” growth stocks). It is, apparently, a “little known stock” that won a battle with Amazon… which, as you can imagine, is not the usual story when Amazon is competing with somebody. Here’s a bit from the ad:
“… just less than a year ago, it seemed as though nobody could pose a credible threat to Amazon if it decided to venture into their industry …until one nimble company did just that.
“They quietly beat Amazon in the race to capture an up-and-coming industry.
“The very same company was just named a high-conviction “BUY” by legendary stock investor and Motley Fool cofounder, Tom Gardner.”
OK, so who is it? Some hints…
“When Amazon decided to launch into this small company’s territory back in 2015, it boldly stood its ground, stuck to its rapidly scaling business model – and within less than a year, Amazon had given up.
“Not only that – they struck a partnership with this fast-moving innovator that refused to go down.
“Amazon, that very same juggernaut that dominates almost everything it touches, recognized that it simply couldn’t take on Tom’s newest pick, so the two companies joined forces instead.
“And since then, the stock is already up 23%.”
And apparently this isn’t the first time the Fool has recommended this stock — they like to make a big deal out of the fact that their re-recommended stocks by the Gardner brothers have been some of the most spectacular performers over the years, and this one is apparently a three-peat in just the last six months. In their words:
“It’s not hard to see why …in the weeks since that first recommendation in February, this stock quickly went on to crush the S&P 500 – by over five times.
“In the weeks since its second recommendation in March …it went on to crush the S&P 500 again – by another five times.
“And now Tom is recommending this freight train yet again – because he and his elite team of analysts firmly believe it’s just beginning its meteoric run.”
OK, so it was picked by the Foolies in February, March and, apparently, July… so what is this stock that they’re calling a “David and Goliath story?”
Thinkolator sez, with a little bit of guessing, that they’re probably talking about Shopify (SHOP, SH in Toronto).
And that stock has come up here in the pages of Gumshoe in recent months as well — this Canadian company was teased by the sister Stock Advisor service from Motley Fool Canada last month, and I wrote about it on June 6.
Why is this the match today? Well, Shopify is a company that essentially helps retailers (budding or giant) set up online stores, and integrates those stores with a website, payment solutions, fulfillment solutions, and marketing connections that integrate social media.
And Shopify does have a partnership deal with Amazon, one that partly is related to the fact that Amazon introduced a Webstore product/service back in 2010 that was not overwhelmingly successful… Amazon’s Webstore service, which helped people set up independent webstores that were fulfilled by Amazon, is now officially closed.
And, as it so happens, the “preferred migration partner” for those affected by the Webstore shutdown is Shopify. I wouldn’t necessarily say that Shopify beat Amazon, since I don’t think Amazon’s heart was in it. Amazon isn’t incentivized to help people build their own brands, they’d much rather have them sell directly through Amazon… and I expect their Webstore product reflected how little Amazon really cared about whether it succeeded. Shopify built their product with the focus of helping retailers, not with adding more fulfillment volume to Amazon’s business, so it’s no surprise that Shopify’s product is a lot better in those merchants’ eyes.
The announcement that Shopify has a partnership with Amazon helped to boost the SHOP share price back in September when it was announced, that’s why the shares were above $35 for a little while, but it’s been a bit softer in the months since then — currently, the shares are at about $32, and it’s a tiny company with a market cap of about $2 billion… but it does seem to have a strong market position with new businesses and with large companies who are looking to outsource a branded online retail operation.
Nothing fundamental has changed about the company since then, other than the stock going up about 7%, and I haven’t done additional research on the stock at this point, so I’ll reproduce here what I said back on June 6:
They are in an appealing space, with a good business model — they sell a service to small and medium-sized retailers on a monthly subscription that scales with the company, smaller companies might just use their technology to offer a “buy” button and ordering system for their Facebook page for $9 a month, or they might pay $29 for a real online store, or up to ten times that much for a more robust offering that provides more analytics and marketing options. Revenue is driven both by their monthly subscribers and, because they offer a payment processing system and disincentivize the use of alternate payment systems, by the credit card fees that are somewhat comparable to those charged by PayPal or most online “shopping cart” providers.
It’s a very competitive business, and they’re competitive in their pricing but certainly aren’t the cheapest, and Shopify seems to be pretty popular — particularly with those who want a “one stop shop” with very low requirements in terms of required coding or web design skills. They aren’t the only ones who offer an “anyone can do it” online store, but they’re certainly among the leaders. And unlike Etsy or Amazon or Ebay, using Shopify doesn’t restrict you to using a particular marketplace or give up some control of the customer relationship, though Shopify does partner with Amazon and Facebook and probably others in making it easy for retailers to use most big traffic sources for their marketing and, in the case of Amazon, fulfillment.
I don’t really know whether Shopify will “win” this market, but it is growing very fast — you can see their latest quarterly press release here, but they’re forecasting that they will end 2016 with between $337 and $347 in revenue, and last year they reported $205 million in revenue, so that’s strong top-line growth of almost 70%. They still think they’ll be losing money, with a GAAP loss of $41-47 million for the year (they’d like to exclude $25 million of it for their stock-based compensation costs, but even with that it would be a loss).
With that kind of growth, they could probably make a profit this year if that were their focus — 70% revenue growth, if their margins remain the same at about 55% (they might not, it depends on whether more of the revenue comes from higher-margin subscription payments or lower-margin services like payment processing), would give them gross profits of $180+ million… if they could get those kinds of revenues by only growing their operating costs by 40%, they’d be in the black.
That probably won’t happen, as they indicate in their forecast, but it’s a possibility over the next couple years if things continue as they are — they have slowed down the rate of growth of their operating costs (that’s selling and marketing costs, R&D, overhead, etc.), which makes sense because it should be a very scalable business, the engineers who make sure the system works don’t have to work quite twice as hard if they have twice as many customers using the system. The projection of $41-47 million in GAAP losses for 2016 means they’re not expecting to become much more efficient, that would mean that margins for 2016 will be similar to 2015.
Which makes sense — the reason they went public, after all, was the raise their profile and raise some money that they could use to take market share and build the company and the brand. They still have $150 million in cash or thereabouts, so they can afford to push growth for a couple more years before they have to be particularly concerned about margins — and since a shopping cart offering is very sticky, their client retention should be very high. They ought not to be losing customers, except for the customers who just stop selling — as I’m sure you’re aware, small and medium-sized businesses go out of business quite often — and the few customers who get too big to think it’s reasonable to pay Shopify’s fees and have the cash to invest in building and maintaining their own systems.
All of which gets to the conclusion that it seems like a reasonable business, with a strong tailwind as more people shop online and more small online businesses are started, but that should be weighed against the fact that though their retention should be quite good for the customers they already have, customer acquisition will probably continue to be expensive and challenging in the face of strong competition from other players, some of whom are, though not public, fairly large and well-funded by venture capital.
The free articles on Motley Fool Canada occasionally mention Shopify as well, they posted a free article here that sums up why they think 2016 will be a “fantastic” year for the company, and the Fool’s US site posted a pretty good article about their latest quarterly results here.
I find SHOP’s growth compelling, their forecasts for the year provide a pretty strong degree of confidence, and I like the stickiness of their relationships with their customers… I’m even pretty OK with the fact that they’re losing money at this point, since margins are gradually improving and there’s a clear return on investment as long as they can make good decisions in the future and dial back their expenses fast enough as their growth rate slows.
What worries me is the competition from other established e-commerce providers like BigCommerce, WooCommerce, Magento, etc., even though Shopify seems to have a pretty “top of mind” position in that group, and I would also worry about the possibility that small changes from large companies like Google, Facebook or even Amazon could quickly damage the business in ways that are hard to predict. We saw that with Demand Media (DMD), for example, in the internet content space… one quick change from Google in ranking their search results, and what you thought was going to be 30% revenue growth forever turns into annual declines and a slow erosion of the business.
That’s not a fair comparison, probably, since DMD was mostly a junk business, but it’s important to remember that almost all internet companies (Stock Gumshoe included) rely in part on the whim of the algorithms at Facebook and Google. The leaders at the top don’t change that quickly once they’re firmly entrenched, I think we probably assume too high an obsolescence risk for gigantic “ecosystem owners” like Apple, Google, Facebook and Amazon since this seems to be a world where there are natural monopolies and “one winner” businesses… but the smaller players who live at the feet of the giants can see their circumstances change quickly when the giants shift position.
Here we are six weeks later, and I still feel much as I did in early June — I like the product, largely because it’s a “sticky” subscription and customers seem very pleased with it, I’m worried about competition because being “sticky” retention isn’t enough and they need a lot of growth to justify their share price, and I don’t have a sense for when any “scalability” might hit the numbers (over the past year their revenue and expenses have both risen at almost exactly the same rate, which is good because they’re investing for growth and they have plenty of cash, but to become a successful business they eventually need to grow their earnings more quickly than they grow their expenses).
I haven’t nibbled on this one personally, but I’m still a bit interested… be mindful that they are reporting their next quarter in about two weeks, so there could be quite a bit of volatility and the story could change quickly on August 3.
And… that’s all from me. What do you think? Use our friendly little comment box below to let us know.