Guardian Fund: “We Believe that the Valuation of Shopify (SHOP) is Fair”

Guardian Fund, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here.  A quarterly portfolio return of +16.85% measured in euros, net of fees and expenses was recorded by the fund for the first half of 2021. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Guardian Fund, the fund mentioned Shopify Inc. (NYSE: SHOP), and discussed its stance on the firm. Shopify Inc. is an Ottawa, Canada-based e-commerce company, that currently has a $185.6 billion market capitalization. SHOP delivered a 32.07% return since the beginning of the year, extending its 12-month revenues to 44.88%. The stock closed at $1,494.99 per share on July 09, 2021.

Here is what Guardian Fund has to say about Shopify Inc. in its Q2 2021 investor letter:

“It is impressive how fast Shopify is growing its relevance and moat. The decoupling of jobs from location and democratization of participation in the internet-enabled economy is changing lives and business architectures. The modern enterprise is a core with a big partner network of applications around it. Today, any person can lever this network to run a commerce strategy. In his excellent message to Shopify employees, Tobi Lütke, wrote that Shopify is not a family but a team of which the members must perform and will be judged on performance. Now this team can hire any skilled person with internet access regardless of location.

In the payments business (Merchant Solutions) Shopify takes a margin on Gross Merchandise Value (GMV) transacted via the platform. As GMV is growing faster than Subscription Solutions (pricing plans for merchants to access the commerce tools), merchant tools are increasingly becoming a way to grow GMV and therefore the payments business.

On June 15, Shopify announced the strategic move to open up Shop Pay, the excellent checkout system, to all retailers selling through Google and Facebook. As a result, stores that exclusively exist on Instagram (not Shopify) can use Shop Pay for payment processing. The reason for Google and Facebook to agree to this integration is that it drives better conversion of their stores (Shopify claims that checkout on Shop Pay is 70% faster than a typical checkout resulting in 1.72x higher conversion rate) and therefore it enhances Google’s and Facebook’s core business which is advertising.

Shopify is enabling Google and Facebook to better compete with Amazon. The multi-channel future of commerce is now going to make Shopify’s merchant tools even more important; Shopify president Harley Finkelstein said: “You now need to reconcile inventory across eight or nine channels. You now have to handle shipping and fulfillment across eight or nine channels. And so as the complexity increases, the value of using Shopify as the central retail operating system also increases.”

About 10% of all e-commerce in the U.S. is going through Shopify (versus 39% through Amazon). On June 29, Shopify announced that they are removing all revenue share on developer’s (together earning USD 233 million in 2020) first annual USD 1 million as well as cutting the commission rates from 20% to 15%, which is about half of what other app stores charge. It has become a no-brainer for software developers to create products for the Shopify App Store. This will further grow the
quality of the ecosystem.

Environmental issues are on our mind when we do the investment analysis. The space in which we are investing is a net positive force in enabling our species to tackle problems such as emissions. It’s worth noting here that Shop Pay is one of the first carbon-neutral ways to pay as Shop Pay offsets 100% of the delivery emissions for every order.”

On July 7, Harley Finkelstein said: “The future of commerce is still in front of us. Here’s what I mean: if the world of e-commerce was a baseball game – we are still at the hotel. We haven’t even left to go to the stadium yet. That’s how early we are in the story of ecommerce.”

We believe that the valuation of Shopify is fair because it is not just a software-as-a-service business; the platform is becoming a payment business that takes a royalty on global internetenabled commerce. And as the leading central retail operating software platform the runway of non-linear growth is enormous. We have invested a significant percentage of the portfolios in
Shopify because our vision is that this is becoming a USD 1 trillion market value before 2030.”

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Based on our calculations, Shopify Inc. (NYSE: SHOP) ranks 28th in our list of the 30 Most Popular Stocks Among Hedge Funds. Shopify Inc. was in 91 hedge fund portfolios at the end of the first quarter of 2021, compared to 90 funds in the fourth quarter of 2020. SHOP delivered a 21.81% return in the past month.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.