What a Difference a Month Makes - Andrew Left

What a Difference a Month Makes

Shopify to $100 in the next 12 months

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SHOP is 2019's NVDA ? It's Unstoppable Until It's Not

Follow Up to Citron's 1 Year Challenge on NVDA

A year ago, when Nvidia was trading at $230 and there was no stopping this leader in AI and datacenter, Citron foresaw the compe>>on and eventual headwinds to its core business. While investors cheered the stock all the way to $290, we stuck by our guns and just when the stock looked unstoppable it collapsed to under $130 in just two months.

If Shopify is trading over $200 in 12 months, Citron will donate $200k to the Robin Hood Founda>on.

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The Good, Bad, and the Ugly

Citron famously commented on Shopify 18 months ago as we were cri>cal on its dependence on "entrepreneurs" otherwise known as dropshippers. While we maintain our cri>cism of that part of the business, we give full credit to Tobi and the Shopify team for crea>ng best in class ecommerce soOware for SMB merchants.

The move of 50% in Shopify' stock price this year despite its below consensus profit guidance can be aVributed to the rise in social commerce. However, remember that this guidance was given BEFORE the news flow over the past 30 days. Just when the business seemed unstoppable, the obvious change in narra>ve for this market darling will soon cause it to fall vic>m to the forces of gravity from its stratospheric valua>on -- which was based on no compe11on, no regulatory risk, and flawless execu1on.

While Shopify has been expensive for a while, the short now is not a valua1on call but rather a dras1c change in the compe11ve and regulatory landscape. These risks will almost certainly nega1vely impact the growth of a stock priced at a forward mul1ple of over 300x.

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What Has Changed?

In the past month, A LOT has changed for Shopify: ? The stock traded to an all->me peak valua>on ? Facebook launched Instagram checkout ? Square announced it is revamping its online store ? Mailchimp terminated its partnership with Shopify ? Mark Zuckerberg pounded the table on cleaning up the Facebook pla`orm ? News surfaced that MicrosoO was launching a compe>>ve offering to Shopify The combined result is a perfect storm for Shopify that will knock the stock off its high wire to $100 in the next 12 months.

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Instagram Checkout

At the end of 2018, while investors were focused on the Instagram execu>ve departures and Facebook privacy issues, the real story became the eleva>on of Vishal Shah, a long->me Facebook employee who was chosen to run Instagram, and his dedica>on to making Instagram a na>ve shopping des>na>on. Citron noted this in December in our Facebook research where we named it the S&P's 2019 stock of the year and recommended readers buy it at $126.

It cannot be denied that the success of Shopify is directly >ed to Facebook and Instagram ads. We give Shopify credit for being early adopters in integra>ng its ecommerce pla`orm with Instagram and benefi>ng from social influencer marke>ng.

While this does not immediately s>fle Shopify's business, the risk to this beyond high mul>ple stock cannot be ignored. The risks were even acknowledged by Shopify's biggest bull -- RBC analyst Ross MacMillan -- who warns that Instagram's new system "circumvents" Shopify's and will impair its ability to profit from Instagram's future growth.

The same concerns were echoed by Evercore's Anthony DiClemente as he wrote that this launch "effec>vely eliminates the dis>nc>on between Instagram as a social media pla`orm and an e-commerce marketplace" and that "Instagram has proven a powerful product discovery plaDorm and its entry into e-commerce can't be ignored". 05

Instagram Checkout

Think about this. There are 25 million businesses on the Instagram pla`orm that do not even have a website. Facebook believes that these merchants can use Instagram's 500 million daily users as its pla`orm. The launch of this new checkout feature eliminates the need for an external website (i.e., one that is hosted by Shopify) for these businesses.

To show the muscle and influence of Facebook, it should be noted that the checkout launch ini>al adapters are Kylie Cosme>cs, the face of Shopify's success, and Nike, the ul>mate enterprise customer, among others.

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It's Hip to be Square

Last year, Weebly was acquired by Square. At the >me Weebly seemed like a sub par offering rela>ve to Shopify. Just two weeks ago, Square launched a product offering to its over 2 million merchant installed base consis>ng of a full suite of ecommerce solu>ons that is compe>>ve to Shopify.

hVps://about/investors/press/a59ba0b5-ac91-4482-8f1a-428f475a5f28

Even if you assume that Square does not capture any of the current Shopify merchants it cannot be denied that this will put a damper on Shopify's future growth in the SMB market.

This was noted by ad execu>ve Steve Weiss: "It's preVy clear Square is making a strong, well>med play for Shopify's market share while con>nuing to aVract larger merchants."

hVps://news/square-challenges-shopify-with-e-commerce-tools-for-sma ll- businesses/551304/

While Shopify's growth includes encouraging future "entrepreneurs" to quit their current jobs,

Square will be migra>ng higher quality merchants from its exis>ng installed base.

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From Gorillas to Chimps

While Shopify now has to compete with the gorillas in social marke>ng and SMB payments, the vulnerabili>es of its ecosystem were just exposed by the chimp.

As the world is moving towards greater enforcement of data privacy, Shopify's new terms of service appear to be moving in the opposite direc>on, as highlighted by its recent divorce from noted enterprise partner MailChimp.

Whatever version of the truth you believe, it's clear that MailChimp could not agree with Shopify's new privacy terms and believed poten>al li>ga>on and headline risk outweighed the benefits of the Shopify partnership. In a sign of the impending compe>>on, MailChimp did partner with Square as it obviously felt comfortable with Square's terms of service and that any lost Shopify volume will eventually be replaced with Square volume.

The poten>al risk to media coverage of Shopify's privacy terms could severely damage the mul>ple of Shopify at any >me... just look at what happened to Facebook. Citron believes the real story is not the risk of Kylie Jenner geqng your home address. Rather, your customer informa>on is being shared with dropshippers and app developers, many of whom have no real business and could poten>ally use a Shopify site as a ruse to collect customer data.

Does anyone remember the famous personality test that was a Trojan horse for the collec>on of customer data?

Most importantly, the MailChimp divorce could put the "Scarlet P" on Shopify which could impair all future enterprise business and you can be sure that

compe>>on will make poten>al customers aware.

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