Feedback on Stock-Pitch.
I have an equity research interview coming up and I've decided to prepare my stock-pitch. This is my first draft and I would really appreciate some guidance / critiques. Thanks in advanced.
I'm having trouble tying to keep it under 2.5 mins. What should I remove? What should I add?
Disclaimer- when I wrote this pitch, it was trading @ $37..it isn't anymore lol so I have some updating to do.
Shopify provides a leading cloud-based commerce platform designed for SMBs (small and medium sized businesses). Merchants use the company’s software to run their business across all their sales channels. Merchant solutions, which makes up 71% of revenue is their most popular service.
SHOP is currently trading at $37.00, down ~80% from its ATH of $170 in Nov. 2021, where it was trading @ 288x EV/EBITDA or 48x TEV/S on 57% yoy revenue growth and an EBIT margin of 15%.
The collapse in stock price was due to normalizing growth rates, as the economy reopened and a broad market sell-off due to inflation and rate-hikes.
However, I think going long at the current valuation of 8x EV/S would yield satisfactory results over the next 6-12 months.
My thesis is:
- Competitor abondonement BIGC CEO, Brent Bellm, in an interview with CNBC, stated that they were focusing on Enterprise customers going forward, giving up on SMBs.
- SMB TAM Penetration: Current SMB TAM equates to ~160b, growing at a CAGR of 21%. Forecasted out 5yrs yields a 2026E SMB TAM of ~$370b. SHOP’s 2021 revenues were ~$4.6b, which means SHOP’s penetration is 3.00% respectively, which increased 4x from 2016’s penetration of 0.70%.
- Many different levers: Every expense item an SMBs P&L is an opportunity for SHOP to launch a new service and make money.
- Scaling Pricing Power: As SMBs become Enterprises they become less price sensitive, SHOP’s take-rate as a % of GMV which was $175b in 2021, was 2.6%. Leaving SHOP ample room to increase their take-rate as their customer’s scale.
Valuation:
For my valuation: . In a post inflation/COVID world, I assumed that SHOP’s Rev. growth resumes it’s pre-covid growth @ a CAGR of 49% as GMV spend increases and SHOP increases their take-rate gradually as customers mature. In my terminal year, Merchant solutions consists of roughly 82% of total revenues which increases my EBIT margin to 26% vs. 16% in 2021A.
Using the Perpetuity growth method, this yields a Terminal EBIT of $9b, assuming a 21% marginal tax rate gives us a Tax-Affected EBIT of $7b then adding back D+A of $107m gives us a Terminal Tax-Affected EBITDA of ~$7.3b.
Subtracting out capex $102m and NWC of $166m gives us a Terminal FCF of $7b. Using a WACC of 12% we get a Terminal value of $77b or about $47b today.
If you add back the NPV FCF $9b you get an EV of $56b which is an implied Terminal EV/EBITDA of 6x.
Finally, subtracting out net-debt of $1.3b we get a Total Equity Value of $58b or $46 per share, which implies 24% upside.
Risks:
- SHOP growth never restores.
- Inflation Persists
- Market Sell-Off continues – This will make their unrealized losses worse
- Recession worsens.
Catalysts:
- Market Turns Around – FED pauses rate hikes.
- Inflation Normalizes
- Good Earnings Call
- Consumer spending increases
