what is happening with shopify stock

Shopify Stock Analysis: Trouble Ahead when analyzing any stock there's two,things that we want to kn


Updated on Jan 26,2023

Shopify Stock Analysis: Trouble Ahead

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Shopify Stock Analysis: Trouble Ahead

when analyzing any stock there's two,things that we want to know up front,first what does a company do and then,how do they make their money so when you,think about what Shopify does imagine,that you needed to sell a bunch of,products online and you didn't know,where to start well,not so long ago there was a lot of,people peddling this idea of being able,to Achieve Financial independence by,Building A Drop Shipping site so what,you would do is find somebody with a,large product catalog,and then you would connect an e-commerce,site to their product catalog and people,would order products from you and then,they would ship directly to your,customers so,it was a way for people to quickly,establish a storefront but what most,didn't think about is the fact that they,had to support those customers and that,it isn't all that easy,as it sounds on the tin so a lot of,people got into Drop Shipping you see,here some ads that were floating around,one says how much money do you need to,start Drop Shipping on Shopify and the,reason that they mentioned Shopify is,this is the largest e-commerce platform,in the United States they have about a,30 percent market share most Merchants,that use this platform they're paying,less than fifty dollars a month so it's,a way to get your feet wet in the world,of e-commerce and the company focuses on,providing cost-effective solutions for,early stage businesses it's very,accessible so when the coronavirus,happened a lot of people moved to buy,things online and then a whole different,contingent of people had a lot of time,on their hands so they decided to start,businesses and this is the easiest way,to start an e-commerce business it's,very accessible very affordable and,they've worked out all the Kinks so when,you think about Shopify being an,e-commerce platform that subscription,model is how they started and we look at,the performance their share price it's,down 76 percent year to date and that's,kind of typical for growth stocks that's,compared to a NASDAQ return of about,minus 25 percent over the same time,frame so a number of readers and,subscribers had asked is Shopify a good,stock to look at well when we look at,how they're making their money there's,two Revenue segments that we need to pay,attention to the first is subscriptions,that's what we talked about that's about,28 of their total revenues and look at,that gross margin so it's upwards of 93,they're making a lot of money on that,solution but when it comes to growth,it's growing slower than their other,segment which is Merchant Solutions so,we talked about subscriptions we,understand how that works you subscribed,and you access the e-commerce platform,but then once you're a successful,Merchant and imagine that most on their,platform aren't then they get you with,Merchant Solutions so this is a growing,percentage of the revenues it's lower,margins still high though at 60 percent,and a growth of about 7.5 percent both,of those growth numbers were taken over,the past eight quarters to quarterly,growth now um to understand the merchant,Solutions segment they want you to pay,attention to this gross merchandise,value metric which they provide and it's,liberally slathered all over their,slides and this is correlated to the,success of that segment because it,represents the amount of money going,through their platform so successful,Merchants are selling a lot and when,they do people pay for those products,and there's a Shopify payments,processing piece that collects fees,based on daily transactions so that's,quite lucrative that's the they say the,largest component of merchant Solutions,but when you say largest that means,nothing it could be 11 and the rest,could be ten percent or what not right,so you just don't know,what percentage of merchant Solutions is,Shopify payments because they're also,talking a lot about things like Shopify,Capital shop pay installments Shopify,shipping fulfillment which they've been,getting into lately with the acquisition,of a particular firm that we're not,going to talk about today and then,there's this Shopify plus which is a,more extravagant subscription model,somewhere in the 2K range for larger,businesses so right away we're,interested in knowing more about,Merchant Solutions because that's where,all the growth comes from in particular,we're interested in the money that,they're loaning Merchants so when you,start to dig into their financials or,you look at their latest earnings report,they talk about how,416 million dollars has been funded by,Shopify capital for merchants this last,quarter up 15 percent year over year and,that so far they funded 3.8 billion,dollars in cumulative Capital that's,about all we know there's another metric,in their income statement that shows,losses it's called transaction and Loan,losses and here we've plotted that out,as a percentage of merchant Solutions,revenues you can see that it's spiked so,we're very interested in understanding,more about that unfortunately this,company gives us no granularity into,that large segment of revenues when I,say no granularity there's almost,nothing there aside from the monthly,recurring Revenue number they call mrr,and this gmv gross merchandise value,number that they throw around so we're,really hurting to understand how exactly,they're making money in merchant,Solutions and that really matters now,what makes things even worse is that,their earnings this is a Canadian,company so they may be doing things,differently than how firms might report,in the U.S certainly their filings are,different so you have to contend with,that but take a look at the earnings,reports here and you'll notice this is,quite odd you have,what appears to be over a billion,dollars in earnings positive earnings in,the third quarter of 2021 and suddenly,uh that starts falling and then look,this most recent quarter they had a loss,of about 1.2 billion dollars and before,that a loss of over 1.4 billion dollars,what's going on well when you look at,their books they've made a couple very,large Equity Investments and one of,those is in a firm it's a buy now pay,later company and we've always warned,investors about bnpl because it doesn't,require the firms that extend that,credit doesn't require them to vet,anyone's credit and the argument as well,the AI algorithms do a good job of being,able to tell who's able to pay back well,that doesn't consider that you have lots,of bnpl vendors out there extending,credit and a lot of individuals are,taking advantage of that and you can,look on social media and see the people,that are weekend millionaires with all,the cheap tabs expensive tats that,they've purchased through bnpl,arrangements so a firm has certainly,been punished and focus is starting to,be placed on the quality of the credit,that they've been extending so when you,look at these two Equity Holdings on,shopify's balance sheet you can see that,they've collectively lost 75 percent of,their value so far this year that's not,a big deal that's what tech stocks do,it's just a shame that they're reporting,that in earnings so that you don't get a,real good picture of what's going on you,have to back those numbers out but,that's probably the biggest problem here,is that it's obscuring,how you view their quarterly results and,it takes extra time and effort to,understand what they're actually doing,with a firm that's already very,difficult to follow so we don't believe,that an investment in a bnpl firm is a,very good idea now when we look at the,valuation of Shopify they're not overly,valued they're right alongside Robin,Hood maybe you could say they're still a,little bit Rich compared to some of,these other fintech names we've listed,out here so it certainly has room to,move downwards but the big problem with,Shopify the consistent theme in looking,at this firm is just how bad investor,relations is the latest quarterly,earnings deck it looks like some interns,went around collecting statements from,each department and they kind of just,splashed those all over some slides,there's not a single chart in the entire,deck it's very amateur it's very poorly,put together and that's a concern,because it makes this firm very,difficult to file follow and you want to,invest in companies that you can,understand and track easily so for,example how do we find out about,geographic concentration that's pretty,basic a pretty basic item we looked for,and couldn't find you have customer,concentration number of customers,Revenue buckets you know who's paying,what Shopify this premium Shopify plus,how many customers they have on that,what are retention rates looking like,none of these metrics are given there's,no granularity in that Merchant,Solutions segment so just to conclude,the two key metrics that you have to,watch this gmv and mrr that's all fine,and dandy but it's not enough to gauge,the health of the company and these,Equity Investments they've made,obfuscate their earnings and in a,recession what happens you have a lot of,small businesses hit the skids and small,businesses are what Shopify caters,towards we're not told otherwise we're,not given any indication of the size of,the companies that they're working with,but you will see small businesses go,under and you will see consumers curtail,their spending so this isn't a firm that,we want to have exposure to in a bear,Market especially given how opaque the,entire business is so uh put your,comments in the comments section make,sure to subscribe to our Channel thanks,for taking the time to watch this video,today

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