Why I bought Medical Facilities Corp and Shopify – Part II

Quick Facts

Industry: Software – Application

Sector: Technology

10 year return (ROE): N/A

S&P 500 return (10 year): 9.6%

Type of buy: Growth

Payout ratio: N/A; does not pay dividends

Price

  • Recently had its IPO at $17 in 2015. It has returned approximately 150% in the last 12 months.
  • At approximately $123, I thought initiating a position would allow me to understand this company better. Please note, I did a high level business model overview of this company before buying this.
    • Price is a compelling point, and this was proven when it went north of $130 after reporting a good Q2 and yet went down to $120 and lower. It went lower after I bought it and I will agree I was anxious. The initial days of jittery are hard to get past as market price is telling you something completely opposite to your beliefs or investment hypothesis. I decided to stay put with my purchase and continue to hold it.
  • I have come on to believe if a company is good, then over a longer run the price at which I bought it would be secondary. This is from Charlie Munger’s playbook. In addition, I believe the only way to find out whether you’re winning or losing is by playing the game.
  • Also, I strongly believe in having a hypothesis. What I mean by that is, you need to have a preconceived notion or a gut feeling or an educated guess of the company’s direction before you buy that company’s stock. This would tell you what you expect of your stock in the next 2,3,5,10 years.
    • Again, I did not dig deep into this company; only looked at its growing revenue history, and its business model. That was enough for me to realize this company does have potential to turn out to be a winner.

Business Model

  • Shopify offers  a commerce platform that allows anyone to sell their goods online at a retail location.
  • Basically, they offer a professional online storefront wherein they offer a payment solution to accept credit cards, and POS application to power retail sales. Here, their attempt to simply business solutions by making a snapshot a one stop for every business information is something very helpful. Sellers can organize their products, customize their storefront, accept credit card payments, track and respond to orders.
  • They make money by offering Merchant Solutions and Subscription Solutions.
    • Subscription Solutions – Offers a pay per month based on 3 plans – Basic, Professional, Unlimited. I was sold when I saw this. What this means is they would have a recurring stream of income coming in every month. If they do their job correctly i.e. making it easier for business(es) to view their relevant information using their POS, then they’d come back to them. In fact, it would cost these business(es) more to change their systems and go with some other provider(s).
    • Merchant Solutions – Here, Shopify gets revenues by charging different rates based on the transaction, referral fees from partners, and the sales of POS. The structure of this depends on their subscription – basic, professional, and unlimited.
    • The revenues from both subscription and merchant solutions increased significantly (above 60%)in Q2 and for the 2017 YTD.
      • Consequently, the costs from both increased as well. However, the cost per percentage of the revenues decreased slightly when compared to the prior year 2016 on a quarterly and YTD view.
      • The above tells me, they haven’t reached economies of scale.
  • Ultimately, I felt, Shopify can readily increase the prices for their subscription solutions when they feel their product is well received. I am sure, 95% of the clients would continue to subscribe to Shopify’s services as the cost of replacing their systems would outweigh the price increase by Shopify.
    • This can be huge, as now they would have increased streams of revenues on a monthly basis.
  • The services of Shopify can be used anywhere – there is no physical barrier to most of the countries.
    • They have signed up big brands in Visa, Procter & Gamble, Tesla, and Nestle speaks about the credibility of the product they offer. There is a demand out there!

Fundamentals

  • The revenues were increasing, in the last 5 years at a rapid pace, and this was the only metric I looked into. With that being said, the company’s liabilities are lower than most traditional brick and mortar businesses; as you’d expect with a Tech company.

Conclusion

  • I bought Shopify as I strongly believe that it has a good business model which will yield positive results in future. Only time will tell, on how good this decision was.
  • Also, with the market cap of the company being at $14B (in CAD) approx., there is a huge potential for growth. The eCommerce market is the next frontier, and Shopify is offering merchants – small, medium, and big; all it takes to succeed in this space.

Check out the part I of the article wherein I bought Medical Facilities Corp here. Medical Facilities Corp is a solid dividend payer on a monthly basis.

Latest Comments

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