Earning Tidbits #6: Shopify, Upstart, monday.com
Three emerging tech companies - 2 Holds, 1 Sell
Hello Qvestor,
Hope you are well. In today’s note, I will share a post-ER update on three emerging tech stocks I have covered intensively in the past couple of years - Shopify (SHOP), Upstart (UPST), and monday.com (MNDY).
Last week, I issued the following ratings on SeekingAlpha:
12th February: MNDY → “Hold” rating issued at $212.01 per share
15th February: UPST → “Hold” rating issued at $26.9 per share
16th February: SHOP → “Sell” rating issued at $82.25 per share
Let’s go over the gist of these reports starting with Shopify:
Shopify, Inc. (SHOP)
In Q4 2023, Shopify's GMV rose +23% y/y to a record $75.1B on the back of robust consumer spending, strong new merchant additions, and healthy sales growth at existing merchants. While its product attach rate (take rate) dropped to 2.85% in the holiday quarter, Shopify's top-line grew at +24% y/y to $2.1B [+30% y/y adjusting for the impact of Shopify's logistics business].
In addition to delivering robust top-line growth, Shopify has been improving its margin profile driven by management's cost-cutting measures and prudent exit from the logistics business. In Q4, Shopify's gross profit dollars rose to $1.1B (up +33% y/y) as its gross margin expanded to 49.5% (up 350 bps y/y) driven primarily by tailwinds from exiting the logistics business, which were partially offset by rapid growth (deeper penetration) of lower-margin Shopify Payments business. With operating expenses declining by 22% y/y to $773M in Q4 (primarily due to lower headcount & employee expenses [share-based compensation down to $103M (vs. $146M in Q4 2023)] and exit from logistics), Shopify delivered a record high positive operating income of $289M (13.7% of revenue) versus an operating loss of -$188M from a year ago period. After a challenging post-COVID normalization, Shopify's operating leverage story is now becoming obvious, with Shopify looking like a giant cash printing machine already. In Q4 2023, Shopify generated $446M in free cash flow (at a record high 21% FCF margin).
In my view, Shopify has a clear business moat (as evidenced by subscription price hikes) and years of profitable growth ahead of itself. Unfortunately, Shopify is priced for perfection and more → trading at a +100% premium to TQI’s fair value estimate for SHOP.
On the back of a +35% move in three months, SHOP's 5-year expected CAGR return has dropped to -0.2% (dead money territory). Given management’s guidance for 2024, paying up a hefty premium for Shopify makes no sense. Read my detailed thoughts here: Shopify Is Dead Money
Upstart (UPST)
Upstart dropped like a rock post-ER, with a decent Q4 showing getting overshadowed by a hugely disappointing Q1 revenue and loss forecast.
Amid an uncertain macroeconomic environment, Upstart is tightening its credit box due to deterioration in the primer borrower segment. This is hurting lending transaction dollars and profitability.
Based on management's outlook, Upstart is set to turn unprofitable once again on an adj. EBITDA basis in Q1’24. While Upstart's cash balance of $700M+ is ample liquidity to sustain a quarterly cash burn of $25M, I believe the investment risk in Upstart is now greater than our last assessment. With the stock trading higher, Upstart's long-term risk/reward has deteriorated slightly from November 2023.
In my view, Upstart remains a show-me story. If management executes on their re-scaling plan and achieves adj. EBITDA profitability in the back half of this year or early 2025, then Upstart's stock could do well from here. However, for now, I am sticking to the sidelines, awaiting concrete evidence of a shift in underlying business trends at Upstart. Here’s my rationale: Upstart: Too Much Doubt, Stay Out
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monday.com (MNDY)
monday.com Ltd. reported stronger-than-expected numbers for Q4 2023, with quarterly revenues growing by 35% y/y to $202.6M and the Work OS platform company reporting a narrower-than-expected GAAP operating loss of -$1.1M [GAAP operating margin of -1% vs. -7% from a year ago period]. While monday.com is not profitable on a GAAP-basis, the company reported positive non-GAAP operating income of $21.2M (non-GAAP operating margin: 10%) and free cash flow of $55.4M (FCF margin: 27%) for Q4 2023.
Now, monday's financial outlook for 27-28% y/y top line growth in FY2024 is more or less in line with consensus street estimates going into the report. However, monday.com expects its free cash flow margins to drop from ~28% in FY2023 to ~22% in FY2024 as the company plans to re-invest more aggressively into the Work OS platform [hurting the operating leverage story]. Considering monday's relatively tiny market share (~1%) compared to its $100B+ total addressable market, or TAM, I wholeheartedly support management's decision to increase R&D spending aimed at driving long-term growth. As of Q4, monday's cash position stood at $1.16B and the company has little to no debt, which means monday's balance sheet is in great shape, and I see no liquidity problems for the foreseeable future.
While MNDY stock isn't overvalued like a lot of its large/mega-cap tech peers, the long-term risk/reward doesn't make sense for fresh capital allocation at this price. At TQI, we own a ~1.8% position in MNDY within our Moonshot Growth strategy, with a cost-basis of $111.70 per share. For now, we will continue to hold this winner, but we won't be buying more until and unless MNDY stock experiences a significant price or time correction. If the stock keeps rallying higher (risk/reward worsens significantly) in upcoming weeks and months, we will trim in accordance with our portfolio rules.
Read my detailed update: monday.com Stock: Ripe For A Breather
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Thank you for reading. See you next time.
Cheers
Ahan