DISCLAIMER: Below are my opinions on two stocks, SHOP and PTON. I am not a research analyst or a registered investment advisor, and the information in this article is not a recommendation to buy or sell shares. It is just my two cents. I (now) own shares of both companies.
With the election more or less over now (I think), I thought it would be worthwhile to look at a few of the high flying companies which are often discussed but which I have not owned in the past. What makes this article awkward is that I started writing it over the weekend using Friday’s closing data, and then my price action commentary became nearly irrelevant after Monday’s wild ride. The two companies I am going to discuss below are Shopify (NYSE: SHOP) and Peloton (NASDAQ: PTON), both stocks that are considered stay-at-home or – as the acronym is better known – WFH (“work from home”) stocks. Monday was an excellent day for the broader market, but of course the WFH names got hammered as news of a vaccine from Pfizer took centre stage, raising hopes of an eventual return to normalcy. I have never much understood many of the fast-growing newer tech / trendy names, mainly because I am more grounded in fundamentals. It’s as simple as this - I struggle to accept ridiculously high P/E ratios and valuations for companies that are losing money, especially ones that I struggle to understand their business in this first place. As I started down this path, I said I would spend only 15 minutes/name, which then extended to 30 minutes/name, then to one hour, and then more. I had to stop somewhere though, because I am not an equity analyst and there is plenty of comprehensive and in-depth research available from brokerage firms on companies like SHOP and PTON than you will get from these short write-ups. Even so, I wanted to do some “cursory” work and see if the companies, stock price aside, appealed to me, and if so, at what level might I consider buying the shares.
As I mentioned when I started this article over the weekend, I did not expect SHOP to fall 13.6% on Monday and PTON to fall 20.3%, especially since both prices fell into target areas where I had decided that I would buy them on a pullback. Having developed a better understanding of both companies, I bought shares in both companies near Monday’s close. Time will tell if I am a sucker, a lucky “buy the dip” investor, or a visionary (or somewhere in-between). However, I do like both companies long term, Shopify more. The issue for both is can they “grow” into their very rich share prices by producing the earnings and cash flows to justify their ridiculously high share prices, even as the sands under them are shifting as the pandemic ebbs and flows.
Shopify Inc. (NYSE: SHOP), https://investors.shopify.com/home/default.aspx
Sector: Information Technology
Business: Provides an e-commerce platform for merchants to sell their products through store-fronts, including fulfilment, payment and shipping services. In other words, small businesses develop their storefronts on the Shopify website, and Shopify provides a comprehensive range of services, including web design and payment services, to help the business develop. I would think that Wix.com might be the best-known competitor, although its less geared to businesses in my opinion.
Credit Profile: Small balance sheet because not asset intensive. Very little debt and substantial cash and marketable securities, representing over 80% of total assets and totalling collectively $6.1 billion. Convert (Sept 2020 on favourable terms) but no straight debt outstanding. Has been to the equity markets several times in since Sept 2019 raising circa $3.3 bln in new stock sales.
Profitability and Cash Flow: Profitable for nine months ended Sept 30th 2020 at operating profit level and bottom line and generates positive operating cash flow. But has never made money in a full year, although looks likely for FY2020.
Revenues: Revenues come from a combination of subscription revenues (32% revs 3Q20; recurring monthly revenues from users pursuant to contracts; higher gross margins) and merchandising revenues (68% revs; fees/commission for payment and similar transactions driven by volume (variable); lower gross margins). Over time, revenue mix is skewing more towards (slightly lower gross margin) merchandising (transaction) fees. Total revenues have increased four times in only three years, between 2016 and 2019, representing CAGR of 59.4%/annum. 3Q20 vs 3Q19 revenues +96%. Merchants using platform are growing. Strong trajectory, benefitting from merchandisers and store-fronts moving on-line, with CV19 accelerating the trend.
Operating Expenses: Mainly sales & advertising, and R&D. Mostly seem variable. Limited credit write-offs (since extend credit to merchants, circa $248m of loans, etc at 9/30/20 ).
Earnings: Strong growth and have beat analysts’ expectations every quarter this year. TTM EPS is $1.60/share. Earnings have beat analysts’ consensus last three quarters (at least).
Shareholders: 70.5% institutional, “who’s who” amongst institutional holders. Very limited insider ownership.
Motley Fool: Buy recommendation in spite of valuation, since shares only up 9% since early July whilst S&P 500 up 13%. Acknowledges valuation issue but their view is that once pandemic settles down, the trend of merchants moving increasingly on-line will carry on.
Share Performance:
Last 5 Years (YahooFinance.com)
YtD (YahooFinance.com)
My thoughts: The story makes perfect sense – the company has low operating leverage and will move to even higher profitability fast, and management seems to have done a terrific job. Business will be subject to cycles, and of course, is seasonal. CV19 has accelerated the company’s growth without doubt. The issue for me is valuation – it is expensive based on whatever metric you choose, so I would struggle to buy in at Friday’s closing level ($1,045/sh as I was writing this), knowing that a market downdraft or a company stumble of some sort could crush the shares. If you play technicals, I concluded that $900-$925 might represent a buying opportunity, as the shares (per MF) have indeed moved in the $900-$1,100 context since early July. On Monday as the WFH stocks stumbled, I bought into SHOP at near its lows. There could be another leg down because the valuation is silly, but it fell into my target range I decided before Monday's selloff and the shares have had good support and consistent momentum since the pandemic.
Peloton Interactive, Inc. (NASDAQ: PTON), https://investor.onepeloton.com/investor-relations
Sector: Consumer discretionary
Business: Peloton is the well-known maker of indoor gym equipment, principally a stationary bicycle which has a 22 inch tablet attached that allows live streaming and on-demand classes for users, including real time competition against other riders. PTON sells other subscriptions via devices like Apple TV, Roku and Amazon Firestick, offering Bike+ workouts (full body, bike bootcamp), barre and so on. PTON has been developing a similar interactive treadmill that is expected to go on sale in late 2020 (U.K. first) and early 2021 (U.S.+). The company has retail storefronts, is international, and sells ancillary apparel. It generates profits from the sale of its machines but more importantly from the sale of monthly subscriptions to access the real time streaming and on-demand services. At Sept 30th 2020, the company had 1.33 million paid subscribers, and an impressive retention rate of 92%. The stock exploded during the pandemic as gyms closed and people were forced to move their exercise classes “in house”. It is characterised as a “work-from-home” (WFH) stock. Recently, PTON announced that it was producing new equipment at the maximum rate so as to meet demand, meaning that promotions etc had ceased and it is essentially “sold out” for this quarter.
Credit Profile: At the end of 1Q2020 (Sept 30), PTON had around $2 bln of cash and marketable securities on its balance sheet, and no conventional debt although it does have long-term leases of $553m.
Profitability and Cash Flow: It’s difficult to say much about the operating cash flow aside from the fact that rapid growth requires inventory financing which looks to be financed through a combination of trade payables and customer deposits. I would need to look at this more closely, but for now, suffice it to say that the company has solid liquidity on hand and proven access to the equity markets.
Revenues: PTON generated 79% of its revenues from product sales and 21% from subscriptions for the 1Q21 ended Sept 30 2020, which is a higher portion of revenues from product sales than in 1Q20. This almost certainly reflects the fact that subscriptions trail product sales, and product sales have been more robust than ever since the pandemic. The subscription service (58%) has substantially higher gross margins than product sales (39%), which means gross margins are decreasing although – keep in mind – gross profit more than tripled Q-o-Q. The company experienced subscription growth of 133% Q-o-Q, and has a very high retention rate.
Operating Expenses and EBITDA: The most significant operating expense is related to marketing which Peloton can, to a certain extent, dial up or down depending on achieving its revenue targets. It also spends on R&D to keep its technology current and interesting to subscribers. Adjusted EBITDA for the year ended June 30, 2020 was $117.7m (vs prior year of -$71.3m), and adjusted EBITDA for the most recent quarter ended Sept 30, 2020 (1Q2021) was $118.9m.
Earnings: Missed 2Q20 (ended Dec 31 2019), beat 3Q20 (Mar 31 2020) and 4Q20 (June 30 2020). PTON lost $71.6m in FY2020 (ended June 30 2020). The company had bottom line net income in 1Q2021 of $69.3m (vs a loss for the same quarter the prior year of $49.8m).
Shareholders: Over 70% of the shares are held by institutional investors, and less than 1% is held by insiders.
Motley Fool: No recommendation I could find but mixed opinions floating around generally due to rapid ascent since IPO in Sept 2019 (at $29.00/share).
Share Performance (since IPO Sept 2019, YahooFinance.com):
My Thoughts: Peloton is more of a WFH story than Shopify, in that once the pandemic passes, growth could well moderate as people return to more normal (at gym) workout routines. In addition, I have never been a big believer in the stock, and even thought at the time that its IPO price ($29/sh) was way too rich because I thought the company lacked staying power. However, I am encouraged by the company’s stellar 1Q21 results, and also by the fact that the company has more or less sold out of its current inventory for this quarter. This is not a good position to be in ordinarily, but for PTON, I feel it is a strong signal that their growth plan is being well-executed, accelerated by CV19, as the company goes into new geographic markets, rolls out a new product (treadmill) and adds new subscription-based services. As I started writing this over the weekend, PTON had closed Friday at around $125/share, but the stock got hammered today (Nov 9) with the stay-at-home names and closed at $100.01. $125 is too much for me, and even $100 is rich, but I bought at around this level today because I believe PTON is doing the right things to grow into its share price.
I would welcome comments and thoughts from those that agree and disagree. Also, if you see any mistakes / oversights, please let me know!
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