Wednesday, August 21, 2019

Shopify's stock price is ridiculous

I've been selling puts all year (Linamar, Stars Group, Canadian Tire to name a few) and haven't been assigned a single thing, except for 600 shares of Canfor a few months ago at $13. It's been a good year. Writing puts and selling calls when assigned has been working and I am loathe to fix a thing that ain't broke.

Thing is, Shopify is almost at $500 and trading at 30x sales. This is an outer-worldly valuation that isn't close to peers Amazon, Facebook, Square or Wix, which all have price-to-sales ratios in or near single digits. If Shopify were indeed the Next Great Thing I would probably ignore it like I do every other high flying tech company, but it isn't.

Growing up in the 80s, I remember going to different stores for everything. My parents would drag me around to six different stores every Satruday just to get groceries and other supplies for the week. I hated the process of trying to return something to a smaller store, because they made it feel like you were screwing them.

I fully embrace big box stores. I love going to one big store, like Superstore, and being able to buy everything I need for the week. It's quick and it's cheap. And there's no hassle if I need to return something. I do wonder if the person who made my $12 t-shirt was paid a fair wage relative to their local economy, but let's be honest: I'm not going to buy the same shirt from the small branded store in the mall for $18.

Amazon is like the world's greatest box store. It has the biggest selection on the planet and I can shop from work. Perfect. Shopify is quite different from Amazon. Instead of using its software to sell its own stuff, it enables small and medium-sized retailers, the same ones I happily ditched in the 80s, to sell stuff online.

I've visited dozens of Shopify-powered stores. I made my own store to test it out. The software is really slick and Shopify takes care of payments too. The thing is, I don't want to shop at a bunch of stores online. I want to buy everything from one place and be done with it as quickly as possible.

Shopify envisions a world where the storescapes of countless small and medium-sized businesses litter the internet. Its press releases are written more like sales materials to would-be entrepreneurs than investor information. They try to sell this idea that starting a business is hard, but they make it easy. In Shopify's universe, there will be millions of niche sites selling everything from underwear to tea.

This is my nightmare.

As an investor I'm interested in average people because most people are average. The ones who work paycheck to paycheck, who have three children in school, who drink beers on the weekends and play slo-pitch on Tuesday nights and take one all-inclusive vacation every February to Mexico. These people do not have time for the world that Shopify imagines. These people are busy from the moment they wake up to the moment their kids are tucked in. These are the people who are written about from the standpoint of their collective power. The Voter. The Parent. The Consumer.

The Consumer does not have the patience or inclination to spend her Wednesday evenings poring over the newest immaculately designed online storefronts for sunglasses or blankets. This is frankly territory that's reserved for hipsters, college students, various types of real-world dropouts and dreamers. It's a world that has always existed and always will, but not at 30x sales. Shopify is a niche product that will cater to people who enjoy the process of shopping at smaller retailers. The same people who go to farmers' markets on the weekends and enjoy slow food. It's never going to be something that most people do. That average people do. Like shop at Amazon.

I do think Shopify has created a legitimate business but I don't think it's nearly as revolutionary as the market thinks it is right now. It is not the next Amazon. Shopify is giving some new life to small and medium-sized businesses. That's it.

Today the stock closed at $499. I'm shorting it tomorrow with a target of $300.

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