Hey guys, it's sasha shopify, just posted their results and the stock immediately dived by about 16, as i'm recording this video, and there were some really major reasons why that happened, reasons that are pretty concerning to shopify shareholders. In this video i will cover the issues that have come up in the shopify q4 results and explain some of the big problems that shopify has. That may not look good for the business i apologize, but it is going to get a little bit geeky. So on the surface, shopify's performance in 2021 looked absolutely fine and if you read their commentary in the earnings report, it reads as though everything went absolutely swimmingly.

They certainly don't refer to much of the negative total revenue in q4 was 1.38 billion dollars, which is 41 up from q4 2020 great. Then merchant solutions revenue broke, one billion dollars in revenue, which is up 47 year-on-year and is growing really fast. Also really great gross profit grew 37. So almost as much as revenue.

Everything looking absolutely fine right here, but then you see this bit a bit further down right here. That says, operating income was 14 million dollars, which is one percent of the total revenue, and you begin wondering what happened because from q3 2020 to q2, 2021 shopify was growing profitability. After previously losing money. They made an operating profit of 6.6 and q3 2020 and a massive 12 and a half percent profit in q2 2021..

So what happened afterwards? Why did all this go away? Well, that is exactly what the analysts are scratching their heads about and why the share price is currently tanking. The revenue numbers are actually looking pretty good. Shopify got a huge boost during the peak of the pandemic. This is the crux of the reason in q2 2020.

Their revenues went up 97 year-on-year, then in q3 they were still up 97. It was 94 up in q4 and 110 up in q1, 2021 compared to the panic, ridden q1 of 2020 and then after the wave had passed, the growth naturally slowed down, but it didn't slow all that much. In q2, 2021 revenue was 57 up year on year and from q3 shopify seemed to have reverted to a much more normal ish for them at this stage, 45 year-on-year growth. So the 41 growth that we saw in q4 earlier today is indicating that the growth is now stabilizing and given the big jump in 2020 and early 22 at 21, stabilizing at 40 percent after posting 100 growth for a year is not actually bad at all.

The gross margins for shopify also look fine. They have been very consistent and have returned around 55 percent after dropping a little bit during the fast growth phase. By the way, this tool that i'm using here is called seeking alpha and i really like it for getting data to do company analysis and i am a paying member and have been a paying member paying my subscription a long time before i got an affiliate link, But i do have an affiliate link that will give you a 50 discount if you want to use it, it's in the description. So if you want to sign up for that premium subscription, you can pay a lot less than i have been doing anyway.

So what is the problem with shopify? Well, the problem lies further down on the p l, and some of it is not very obvious. Something is in the balance sheet, because shopify's costs are going all kinds of wacky their operating income after those costs is basically break. Even it's zero and the costs are growing at a faster rate than revenue and, on the one hand, you'd say well, that's great. The company is growing as reinvesting money back into more growth, so that money they're putting back in will fuel more growth in the future and that growth will come faster.

But here is the issue for me. Their sales and marketing costs in q4 went up 78 compared to q4. Last year. The revenue only went up 40 percent, so that doesn't instill a lot of confidence because it looks like shopify is either wasting a lot of money or having to pay through the nose for that growth.

And if you look through their sec findings, you go and find this chart. It is their revenue by cohort and if you watch my channel for a little bit, you will know. I love a bit of cohort analysis in this kind of business. So, let's do it so, on the one hand, it kind of looks good because look that pre-2019 cohort it looks kind of good.

It was making around a billion dollars in revenue in 2018 and that cohort has now grown since then to maybe around 1.8 billion, or something like that. So the argument here is that the customers you acquire with marketing dollars then stick around for quite a while and earn you a lot more revenue in the future, so perhaps spending that marketing dollars a lot of those marketing dollars on acquiring the customers is good. You're buying an absolute truckload of future revenue right. Well, let's see first look at the yellow bit for 2021, that is the proportion of revenue generated within the year by customers who were acquired during 2021 and now go and compare that yellow bit to the pink bit in 2020..

Now visually it is a bit bigger. It's kind of hard to tell how much bigger it is, but not all that much bigger based on this chart and i actually went and zoomed in on this chart and then went and copied it over to photoshop and counted the pixels and the yellow bar was About 110 pixels compared to 107 pixels for that pink one yeah, i did do it so about three percent bigger, but the marketing spend in 2021 was 901.5 million dollars compared to 602 million dollars in 2020.. So the marketing spent has gone up 50, but the customer numbers only went up three percent and you could say just by looking at well, that's not very good right, but wait. Maybe it is the pandemic effect.

Maybe getting customers in 2020 was just really easy. Okay! Well, let's look further that green block from 2019 is about 53 pixels tall and the total marketing spend was 472.8 million dollars. So that's about 8.9 million dollars per pixel. I'm sorry! I could probably convert all this into dollars, but it doesn't really matter and it's a lot easier to work on this basis, so we're going to work out the marketing effectiveness of this company on a per pixel basis, all right so 2019 is 8.9 million dollars per Pixel 2020 is 5.6 million dollars per pixel, a lot less so yeah.

It was very easy. Getting customers in 2020 and 2021 is 8.2 million dollars per pixel. I actually then went back through some of the old sec filings found. The same graphs did the math for the earlier years, adjusted it because obviously pixels in the earlier charts are not the same as pixels and the new ones and converting it all to the same scale.

2018 was about 8.3 million dollars per pixel and 2017 was 11 million dollars per pixel, so it looks like perhaps 2021 is continuing that overall downward trend, which is good but then remember that the first two quarters in 2021 still had that insane. 100 percent growth happening because of the pandemic, so roughly 43 percent of the 2021 marketing budget came from those cohorts where getting customers was easy right. So if we conservatively use the 5.6 million dollars per pixel from the 2020 numbers, the average cost per pixel. For those two quarters, let's assume it's 5.6 million - that means that the second two quarters of 2021 were actually buying revenue at 10.2 million dollars per pixel, which is a lot higher than the average in 2019 before the pandemic.

It's not really a fair comparison, necessarily because advertising costs are generally higher in the second half of the year compared to the first half. But given everything we see, it is definitely not encouraging, because this indicates that acquiring customers for shopify is becoming more expensive. The good news, though, is that revenue per cohort is actually growing very strongly over time. Look at that 2019 cohort in 2021, this green bit, that is about 770 million dollars in revenue yeah.

I did count the pixels on that too. So the 2019 cohort made 770 million dollars in revenue and if we use that 55 gross margin figure, that is approximately 424 million dollars in gross profit. If we then ignore marketing costs in 2021, because that cohort remember was bought with 2019 marketing dollars, then the rest of the operating costs weighted by revenue for the 2019 cohort would be 218.9 million dollars. So roughly that means that the 2019 cohort made an operating profit of 205 million dollars in 2021 and that revenue seems to be growing still year on year, which is great.

However, the total marketing spend in 2019 was 473 million dollars, so that 2021 operating income is good. It's already 43 percent of the total cost of bringing that cohort in the long term. Game does look good because these cohorts do seem to earn pretty decent profits over the years after you acquire them, but you can see from this analysis that each of these cohorts realistically only breaks even somewhere around in year four. So that's it takes four years before you start making actual money on the customers you've required before you turn any kind of profit, and that is a really really long time in a software business.

So when you begin seeing that the cost to acquire these customers seems to be now going back up, that is a major concern, because competition is going to be a major factor for shopify over the next decade and competition is going to make marketing costs more expensive. On a per pixel basis, and competition is also going to force a price war which will potentially mean that it's going to take significantly longer than four years to break, even and for a software business four years is a very long time for comparison. Fiverr, which is not the same business but shares some similarities for sure, takes about one and a half years to break even on the same kind of calculation and for fiverr. That metric is actually coming down in recent years, instead of going up anyway.

Going back to the p l shopify technically made a net profit in 2021, but literally all of that profit came because of this weird line called other and if you're wondering what other is, it is just a one-off fluke. Shopify got paid for some work previously that they've done in a firm and global e-shares before those companies went public and when those companies were in public, those shares appreciated massively in value afterwards, so the whole profit for the whole year. Basically just came from that. Absolutely nothing to do with their business, and that is definitely not a very good reflection on their business performance because all of the profit comes from something completely unrelated.

Now shopify seemed to have a really major cost problem, because the costs are continuing to climb significantly above revenues and that break-even point for cohorts could easily go up from four years to six to eight years. And the worst thing is that shopify in their commentary are saying that they are planning to increase costs even further they're saying they're going to be reinvesting every single dollar they possibly can back into those costs, and given the stuff that i just explained to you now That is somewhat of a concern now, if you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching. I really really appreciate it and, as always i'll see you guys later,.