Why is it difficult for investors to discover Shopify potential early?

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Readers are interested in this company

Most mentioned stock in my book release party

In my new book release party “New book releases ‘The Rules of 10 Baggers’, free shipping to Taiwan“, many people discussed this company with me after the party. Whether last year or this year, Shopify was the most talked-about company after my book release party, and too many treaders have mentioned this well-known company over and over again, wishing I could talk about it again. I can speculate that the possible reasons are as follows:

  • In my last two books, I’ve used this company as a prime example of a growth stock, and one of the reasons I’ve mentioned it again and again is that “this company is really a good example to explain how to discover a growth stock, the high growth potential of growth stocks, high volatility of their share prices are characteristic of most growth investments.” Add to this the fact that there is only one company in the world that can challenge the ubiquitous Amazon and its unique business model.
  • The Chinese-language media in Taiwan, whether physical or online, have begun to largely discuss it when the company’s share price has exceeded US$ 1,000 in recent years. That is to say, for most Taiwanese investors, it is a new spot show on their radar suddenly. Most of what the Chinese media in Taiwan can find are news releases, business-embedded articles, and introductory articles that translate news from international news agencies. However, these articles are of limited help to investors who really want to invest. But the most important thing is that few people analyze the factors behind the success of this company from the perspective of US stock investors.
  • I did invest in this company at a very early stage. I am familiar with this company, which arouses the interest of readers. How did I discover it in the first place? How to make investment judgments? What exactly is its competitiveness? And the possible development in the future, these typical investors will have questions.

Shopify mentioned in my latest two books

I have discussed this company in my recent two books; including:

  • In “The Rules of Super Growth Stocks Investing“, specifically 3-6, pp. 222-224, and 4-3, pp. 292-295. include:
    • 3-4, page 198
    • 3-6, pp. 218, 219
    • 3-6, pages 222-224
    • 4-1, page 260
    • 4-3, pages 292-295
  • In “The Rules of 10 Baggers“, especially subsections 5-8, especially 7-2, pp. 358-368. include:
    • 1-1, page 23
    • 2-3, page 89
    • 3-2, pages 116-117
    • 4-2, page 196
    • 6-5, pp. 293, 294
    • 6-5, page 312
    • 6-7, pp. 328, 331, 332
    • 7-2, page 355
    • 7-2, pages 358-368

Let’s deep dive Shopfy

I wish I could discuss Shopify in more depth due to the feedback from so many readers. This is the third article in a series on the company Shopify. You can refer to my other two previous articles: “Shopify, the only rival admitted by the founder of Amazon, how does it make money?” and “Why Shopify is so killing?”

What this article is going to talk about is what readers most want to know, how as an investor, how can we find a highly growing company like Shopify early?

The mentality of the mass

If my memory is working, Shopify (ticker: SHOP) first appeared in Taiwanese media less than two years ago, because the stock price has exceeded US$ 500, frightening many investors, and many media also spelled the company’s name. Into Spotify (ticker: SPOT). But the content of the article mostly focuses on the unattainable stock price, at least so far I have not read any more in-depth articles. There are also many articles related to Shopify in mainland China, but I personally think that almost none of them are to the point. No one talks about the competitiveness of this company; but it is already much better than Taiwan.

Many media and readers hope that I can talk about this company, but as long as I chat with them a little bit and try to know what they want to know the information about Shopify, I will find that the people who asked this question are not interest in how I discovered it, its competitiveness, in-deep business discussion about Shopify these several factors that I personally attach great importance of a successful company. Most people are all uninterested-most people are impatient, don’t want to know why, don’t want to explore the reasons behind their success, don’t want to spend too much time and effort (vernacular writing is too tired). Regarding this phenomenon, I am not surprised at all. This is the main reason why I never discussed this company in any interview. Everyone just wants to know how many times of return I made, at what price price level I bought, and can investors still buy it now? This type of typical has no nutritional problems. Frankly speaking, it is not easy to find this company early. At least I think it is the most difficult one to be discovered among the US stock companies that I currently hold stocks, in my entire investment career, or the US stock I ever bought.

How do rivals comment on Shopify

Buffett once expressed his views on corporate competitiveness. It reminds me very deeply, but I don’t remember the original words; the general idea is “How investors should find investment targets, lock in companies in your current investment portfolio as a benchmark to find a better alternative.” How to comment on Shopify’s competitiveness, I use the words of the chief executives of several major competitors of Shopify to express the most objective:

  • July 2020, Amazon (ticker: AMZN) Statement by Jeff Bezos to the U.S. House Committee on the Judiciary “We also face new competition from the likes of Shopify and Instacart—companies that enable traditionally physical stores to put up a full online store almost instantaneously and to deliver products directly to customers in new and innovative ways—and a growing list of omnichannel business models.”
  • CEO of BigCommerce (ticker: BIGC): “Shopify’s key competitiveness is its strong partner ecosystem, which makes it difficult for competitors to catch up.”
  • May 2021, CEO of Wix.com (ticker: WIX) said: “So I always say that there’s about 7% where we compete and 93% where we don’t.”
  • May 2021, CEO of BigCommerce said: “I don’t know how to go in and make up for Shopify’s 5-year head start with SMBs.”

Why discerning eyes can’t tell greatness from mediocrity

I remember that about four years ago, Andrew Left, the founder of Citron, a well-known short-selling institution in the US, issued research reports “several times”, stating that Shopify’s “stock price is too high, and Shopify’s business model must be problematic (implying that it is illegal).” reported to the competent authority, and then encouraged investors “several times” to short the company’s stock.

The other is a general US stocks retail investor. He started investing in US stocks in the same year as me and also worked in the technology industry. After he saw Shopify’s report in the Taiwanese media, one day he expressed his views on Shopify to me (please note that he is the development supervisor of the e-commerce software platform). He believes that in the market, like Shopify, there are many website building tool vendors that can open online stores, and Shopify is not worth such a sky-high stock price. Either investors are blind, or Shopify is overvalued, sooner or later the stock price will collapse. He thinks he is an expert in software and e-commerce development. He should be an expert, understands better, his justification must be right (this is the biggest myth of many engineers) — but he forgot that the competitiveness of Shopify is not in programming technology ( To be more precise, no company’s competitiveness is built on programming skills or technology), but on the ecosystem established by Shopify (as described in the previous section “How do rivals comment on Shopify”).

Please note that these two investors; one of them is an expert on Wall Street and the other is an average retail investor. I can tell you the current investment results of these two people. As I mentioned in section 1-2 of my book “The Rules of Super Growth Stocks Investing“, Citron announced that it would no longer be short-selling due to the case of GameStop (ticker: GME). I have tracked down a bunch of stocks that Andrew Left misunderstood, as long as the stock price is too high (this is the reason most short sellers want to short, and Wall Street experts do not compare it well. You can refer to my other blog post “Investment concept not worth trying” on the stock shorting, he thinks that there must be a problem with that company, which caused him to rarely read it correctly. It is strange that such a result will make money (because there is no reason but just due to the stock price is too high), investors should not believe it at all. He also encouraged investors to short nVidia (ticker: NVDA) and Amazon three or four years ago. If investors trust him and have not covered the shorts after closing the shorts according to his report recommendation, the nVidia position will lose at least 350% now.

In the two examples I have given, neither of them understands Shopify’s business model, so they can only compare it with the vendors of development tools for general online store. Both think Shopify is not worth the sky-high stock price, because there is no other reason — Just because they can’t understand, they can’t figure out the intrinsic value of Shopify. Citron gave up shorting business. The other continues to be a typical internet hater, chasing out the touted stocks desperately, frequently swapping shares and operating on bands. “Typically he owned many stocks, but rarely held shares for more than two years, as long as there is a market turmoil, rumor, news, or his own mind changed. As soon as these circumstance happen, he sells stocks immediately. Coincidentally, he also bought nVidia in 2017, and it soared all the way, but at the end of 2018, the semiconductor reversed and nVidia fell a lot, his patience expired and sold it all. After that, every time he met with me, he regrets this decision. As a result, his investment performance in the U.S. stock market for the past three decades is not much different from that of the S&P 500.

What went wrong?

According to my article “Necessary conditions for successful investing trilogy: Do investing homework by yourself“, I put forward the trilogy of successful investment; the vast majority of investors think of Shopify in this way:

  1. Collect relevant information and facts as much as possible: Just did research on Shopify’s business, without in-depth research, quick summary and not found that it provides unique ecological services that are different from other competitors.
  2. Make inferences based on the facts: and then conclude that, “again”, it is just a company that builds a website or an e-commerce platform.
  3. Finally, the decision of whether to invest is reached: so its valuation must be compared with the listed companies in the same industry BigCommerce or Wix.com.

The above three steps are the standard way for ordinary investors to research companies and evaluate the stocks. The three-step problem in this example is in step 1. Most people only read financial news, or analyst reports, or Google to read the company profile, at most, look at the Shopify website and browse at will to get to know a listed company, especially a small listed company like Shopify that just IPO and never hear before. This approach leads to the “not fact” obtained in step 1; step 1 is wrong, even if steps 2 and 3 are no matter how strict it is, it is useless, because your starting point is wrong from the beginning.

But why is it not fact?

Why is it difficult to discover the competitiveness of Shopify?

If you simply look at the basic functions provided by Shopify, in terms of the software technology and software, Shopify is indeed no different from all other website building software or e-commerce platforms. In other words, if you look at it from this perspective, Shopify’s valuation should be similar to that of other peers (such as BigCommerce and Wix.com), or even completely inferior to Amazon and Adobe (ticker: ADBE)’s Magento, or Salesforce.com (ticker: CRM)’s Demandware and other technology giants behind the competition for resources. But Shopify has a much higher valuation than any of the companies mentioned in this article, and the P/S value has been maintained between 40 and 45 times. This is not easy, because the current market value of Shopify is close to US$200 billion. In the history of U.S. stocks, there are very few listed companies with US$200 billion or above that have such valuations. At least to my best of knowledge and nearly 30 years of U.S. stocks experience I don’t remember, even Amazon has never been in such market valuation.

However, Shopify takes advantage of the flexible characteristics of startup companies and “focus on Amazon’s pain points, conceive merchants everywhere, and establish Shopify’s own unique ecosystem.” The functions required by the merchants are added bit by bit, and it has gradually grown into today’s e-commerce side hegemon. And these functional requirements proposed by its customers (please note that they are proposed by customers, not Shopify’s initiative; Bloomberg’s rise is also adopting this strategy) Functional requirements are actually what customers expect for a long time. Shopify completely retreats behind the scenes───because consumers place orders on the merchant’s website, and “this website belongs to the merchant not Shopify. If the merchant does not disclose it, no one knows how it works. It’s Shopify’s solution.” The point is that these important functions are “the most critical mission requirements in operation” for merchant customers, and these key requirements are “invisible and extremely difficult to be fully replicated by competitors in the short term.” From the perspective of individual functions, especially from the perspective of laymen, “These intangible functions are trivial or inconspicuous, but in fact they are of immense importance to the integration of all aspects of e-commerce.” In addition, Shopify continues to act, gathering sand can become a tower, and the reputation of small and medium-sized enterprises is especially dependent on word of mouth among customers, and gradually accumulating and widening the moats, and the good reviews from merchant customers that are hard to come by competitors.

This is why it is difficult for average investors to discover Shopify’s competitiveness (that is, its intrinsic value) early.

Lessons learned from Shopify

This is what I have said on many occasions. It is extremely difficult for ordinary investors to discover the value of Shopify early and buy it shortly after its IPO. Intrinsic value is usually difficult to discover, which is the main reason why successful investors are rare. So Howard. Max (Howard Marks) advocated that good investors must have a second layer of thinking. The biggest difference between whether an investment is successful or not is usually in a very subtle place, which is easily overlooked by most people. Especially this kind of opportunity will not be too many. Investors will be very rich if they catch the right one or two in their investment career.

The easiest thing is not to “follow the mass.”

shopify
credit: Shopify

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