This is not a gay bearish opinion. SHOP wouldn’t be a bad stock if their financial statements were not a completely forged lie.
So, get in the ride and let me explain you, fellow ape, how you can make a 300x return by buying 150 put options when price is >1200.
Our main resource will be Shopify annual report 2020 (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
Let’s start with revenue. 2 of 3 bln. is coming from merchant solutions. If you do the math from AR p.157 you will realize that 1.5 billion of Revenue is coming from Shopify payments. It is 50% of year revenue. Shopify recognizes revenue from Shopify payments as a principle. 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.
2) If you review contract terms (section 5) between Stripe, who is processing payments for Shopify, you will see that the whole responsibility and control over payments is on Stripe. In this case Stripe is a principle.
3) If you look at the balance sheet (AR p.102) and note 10 (AR p.122) Shopify simply doesn’t have assets (Property, plant and equipment) to process payments, It literally has no infrastructure. You can’t tell me that 9.3 mln. worth computer equipment can generate 3 bln. revenue for a company with >5000 workers.
4) 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. Financial statements of WIX are: https://sec.report/Document/0001178913-21-001179/ Usage statistics: https://trends.builtwith.com/shop/Shopify https://trends.builtwith.com/shop/Wix-Stores 5) Despite have that Shopify claims that they have 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. The thing is that even the absolute number is lower than WIX, not just percentage.
Sales and marketing costs.
1) Since I don’t believe in revenue figure, I will refer to gross profit (AR p.103). 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.
2) I see ads that say Shopify can make you 30 mln. profit for 30k investment, we all know that only stonks can do it.
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. Just comparable figures, annual Research Expenditures of universities: Princeton University – 326,207,000, University of Chicago – 433,328,000 Do you think that Shopify is more research oriented than some top universities?
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.
So, P&L a lie. What about balance sheet? It looks empty for 150 billion worth company. In my opinion it even worse.
1) It is missing restricted cash. According to the same contract with Stripe: Shopify USA acknowledges and agrees that Stripe or its financial partners may require a reserve to secure Shopify USA’s liability (the “Stripe Reserve”).
2) The cash itself is not trustable (AR p.118). One reason for that is that it 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. Another reason is that there is a consistent outflow of cash from trading marketable securities. I haven’t found a single report with big reliable cash figure that can be confirmed via bank letter.
3) And finally, why Shopify is purchasing so many securities after all? I have a theory that it is done through the cooperation with banks who underwriting their shares. I will come to it soon. Banks are underwriting their shares and in exchange ask Shopify to buy bad corporate bonds and commercial papers from them, thus getting rid of these bad securities. Then they sell Shopify shares on the stock market to you. In fact, I don’t think that they even sell and buy corporate bonds, they are probably just restructuring them and we will never see billions of real cash on the balance sheet.
In my humble opinion, Shopify has very little cash. About 800 million and half of it is restricted.
So how the company is operating then? How it is surviving?
I will tell you that it is surviving by taking money from different investors, including probably you, from frequent stock offerings. If you look at the page 130 of report, you will see that Shopify was doing offering every 4-6 months. And with time the frequency increases. The last offering was in February this year. Before that it was in September. According to my expectation the next offering will be this year in June-July, then September-October, then November-December and after in January of the next year. Than Shopify will declare bankruptcy and go under administration and Tobi will go to jail. Because he can’t get out of the boat how 3 of 7 top managers of Shopify did recently. Do you want to sink with him?
As a final remark I would add that the sparkle that made me make this video was target price for Shopify stock that was set by Goldman Sachs. The bank who was selling its client mortgage bonds in 2008 and was buying itself SWAPs. It made several billion profit while their clients lost everything. It had a hearing in congress, paid 6 billion fee but continued to operate. For Shopify February offering Goldman Sachs was underwriter. They did underwriting at 1300 price. Now they suffer loses and they will do everything to sell you these shares. That is why they determined the highest target price above 1 600.
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