A Look at Shopify and What Some Berkshire Hathaway Shareholders Are Trying to Do

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• A Berkshire Hathaway (BRK.A -99.97%) (BRK.B -1.19%) shareholder proposal to have Warren Buffett be replaced as chairman.
• Focusing on numbers instead of a company's story.
• Comcast (CMCSA -0.65%) getting into live sports in a bigger way.
• The "sports media rights" bubble remaining firmly intact.

Entrepreneur and investor Moiz Ali understands Shopify (SHOP -0.14%) both as a shareholder and a customer. He talks with Motley Fool senior analyst Yasser El-Shimy about Shopify's data insights and subscription platform, the bull case for the company, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 14, 2022.

Chris Hill: Attention sports fans who are also investors. If you've been waiting for the sports media bubble to burst, you're going to have to wait a bit longer. Details on that and a lot more coming up right now.

Chris Hill: I'm Chris Hill joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here.

Jason Moser: Hey. Thanks for having me.

Chris Hill: We've also got a closer look at Shopify coming up later in the show and we're going to dip into the Fool mailbag. I just want to start real quick with your reaction to this story involving Berkshire Hathaway. They've got the annual meeting coming in late April. There are some shareholder proposals on the table and Berkshire Hathaway has come out and their official position on all four of them is to asking for shareholders to vote no. The one that caught my attention was someone is proposing that Warren Buffett be replaced as chairman of the board. I get that he's 91, and I get that he's also the CEO. But I saw this Jason, I just thought come on, like really, this isn't working anymore. Warren Buffett being Chairman of the Board, that's not working for you?

Jason Moser: Yeah, we're doing this now. The shareholder proposals to me, I find them honestly more entertaining than anything else tonight. Sometimes I guess there's merit, but that's the nice part about being an investor is you can voice your concern. If it's something that really matters to enough people, you can at least get it on the docket for discussion. I do get from the perspective of anytime you have a business where the chairman is the CEO, and the CEO is the Chairman. That's very frequent. That's something we see all the time. In an ideal world, I like to see separation of powers. It's nice to see the CEO not necessarily be the chairman. Look at Amazon for example now. That obviously for the longest time was just Jeff Bezos running the show. But now with Andy Jassy stepping in as the CEO and Bezos on the board. That's a little bit of a different setup there. I understand the perspective of the division of power. By the same token, it does feel like this is at least worth mentioning. I want to state this because it matters I think. When you go back and I went through the most recent Berkshire Hathaway shareholder letters, and the numbers are pretty damn impressive. If you look at the per-share market value of Berkshire Hathaway, and you look at 1965 through 2021, the compounded annual gain of the per-share market value of Berkshire Hathaway's 20.1 percent versus the market's 10.5 percent. Pretty impressive. I think we would all agree that's the shareholders have definitely won. Here's another pretty impressive Number 2 there Chris. If you look at the overall gain from 1964-2021, Berkshire Hathaway is up 3,641,613 percent compared to the market's 30,209 percent. Listen man, he may be getting up there in age, but there are two things in play here.

Number 1, his track record is, I don't think anybody can match that. I'm sure maybe there's someone out there could come up with something, but that's a difficult track record to match. Furthermore, they've now addressed succession. They've addressed succession with Greg Abel will step into fill that CEO role when the time comes, and I believe if I'm not mistaken, Buffett's son will be taking over the role on the board when he is unable to fulfill that duty as well. To me, I look at those types of shareholder issues, those types of things that shareholders bring to the table. Just look at some of the data, use some of your common sense there. To me, it seems like, hey, thanks for bringing it up, but no, I certainly understand why Berkshire is encouraging shareholders to vote no on that one.

Chris Hill: Our email address is [email protected]. A question from Cole Voly, who writes, "I'm a college student, I started listening to your podcast six months ago, and I've been investing for two years. Recently, I've been bullish in a more emotional than evidenced based way with a company called Teladoc Health. I'm wondering how you deal with stocks that draw you in maybe more than you should." Thank you for that Cole. Two things strike me about this, Jason. One is I think we've all been there as investors where at some point we realized, I think I've got an emotional attachment to this company and this stock that probably is more significant than just going through the numbers. Two, to Cole's point, he mentions he's been investing for two years. It doesn't take that long.

Jason Moser: Yeah.

Chris Hill: When I read this question, I thought, wait a minute, when did this happen to me? It was about the same time. I had only been investing for a couple of years and I just got a little too attached to a stock, and I thought no, I might not be thinking about this the right way, so he's asking about Teladoc Health, but this could be a question about any stock out there. How do you put your emotions in perspective when it comes to investing?

Jason Moser: I think that is a difficult thing to do. I will say, I think that it gets easier the longer that you do it. First and foremost Cole, thanks for the question. Two years in, you're not alone. This is something that's very common. We have all been there. It is a good lesson to learn as a young investor to not get sucked in by the story because that's where emotions can really take over it. I will use an example here that I've been there in one stock where I really let my emotions takeover, rational thinking in a way. A company called Higher One back in the day. This was a company that was focused on essentially, giving students away to get their Student Aid disbursement checks more quickly, and then also creating a banking relationship, like a student banking relationships so that students, ultimately they were able to get that, that Student Aid distributed more quickly. But they also had a banking relationship formed at a younger age. This was back well before Square and PayPal and Venmo and all that stuff. It was a bit more than novel concept at the time. It wasn't that we weren't doing all of our banking online or at least, so app-based as we are doing now.

But at the time, it just seemed like such a neat story. It was founder-led. I really liked what they were doing. It seemed like they were focused on financial literacy. I even interviewed the founders and the CEO of the business. It was just the more I became familiar with the story, the more the story took priority over the actual numbers. As I follow the business and as the business continued to perform or rather underperform, it became clear that while the story was really neat, the numbers just weren't really supporting it. I think that's where you really need to be able to actually pay attention to the business and make sure that the business is still performing well. I think Teladoc is a good example, and I'm going to use a different company just because I think it's a little bit of a cleaner example simply because it doesn't involve a big acquisition. But I think the point really still is the same here. If you look at DocuSign and I made this point over the weekend, DocuSign, if you look at just two years, DocuSign is essentially round tripped. If you go back just pre-pandemic, DocuSign was one of those pandemic darlings that just took off to the moon. I think we all knew that the price was becoming a little bit detached from the fundamentals of the business, but so it goes that is going to happen.

But if you look two years ago versus today, it's pretty fascinating to see if you look at just two years ago, DocuSign chalked up revenue for their fourth-quarter of $275 million and $974 million for the full year. Pretty good. Fast forward two years, they just reported their fourth-quarter results here two years later. For that same quarter, two years later, they reported $581 million in revenue, and for the full-year $2.1 billion in revenue. Now, it doesn't take a genius to look at this and say, wow, this is objectively a much stronger business. I mean, they have grown by leaps and bounds, they have added thousands, tens and tens of thousands of users to their user base. It's objectively a much stronger business today than it was two years ago, yet the price essentially today is the same as it was then. It all just goes to show you that often times, and this is something that I always try to remind myself, the market rarely operates on our timeline. That's one of the reasons why we take that longer view because the market just doesn't typically operate on our timeline. In the near-term, the market just isn't rational. I think that really goes back to that quote that you've heard.

I think this was coined by Ben Graham back in the day, but you hear Jeff Bezos use it all the time, essentially saying that in the near-term, the market is a voting machine, but in the long term, it's a weighing machine. In your dealings with the psychology in the near-term versus the fundamentals of the business in the long term, so you want to focus on those businesses that are ultimately getting heavier or growing. Teladoc, I think fits the same mold, it's just a little bit. DocuSign is a cleaner example because they don't have that big acquisition of Livongo like Teladoc has. But again, you could look at Teladoc today and you could say, you know what, fundamentally, this is a much stronger business today than it was two years ago, and yet the price is where it is. We're in the throes of a bear market here. We are in the throes of a really difficult market stretch here, and that is something that we all have to deal with and virtually no company is immune to this. But I think typically when you get emotional, take a step back and try to focus on the fundamentals of the business. Look at the numbers over stretches of time and try to determine, is this business stronger today than it was a year ago, two years ago? If you can come up with an objectively clear answer there, then I think it makes it a lot easier to eliminate those emotions and keep focused on the forest as opposed to trees.

Chris Hill: Last weekend was Apple. Today, the Wall Street Journal is reporting that Comcast is getting close to a deal with Major League Baseball to stream a package of baseball games on Sundays. The two thoughts I had when I saw this were, where was the sports bubble popping? I've been promised us for about seven years now. The sports media rights bubble is going to pop soon. Apparently, it's not. But more significantly, Jason, congratulations to those who predicted that the streaming services would be going both feet in to live sports. I shouldn't put it both feet in because this is Comcast and Apple's dipping their toes in the water with major league baseball, but unless it completely flops, they're probably going headfirst after this.

Jason Moser: I'd imagine so. I think that the main reason that sports media bubble hasn't popped is because the landscape it's so much different today than it was just a few years ago, and that as you mentioned is really due to all of the streaming apps that exist today that just didn't exist even just a few years back. Peacock I think is a good example here. Peacock as we know that Comcast offering that NBC-style streaming service, three different tiers free. They have one where you pay 499 a month and you get some ads. Then they have one where you pay 999 a month and you get almost no ads or very few ads. I think it's important to understand why Peacock exists for Comcast in the first place to understand why they are doing this. Ultimately, Peacock is an advertising play first and foremost. They have stated that a number of times is management views Peacock is ultimately as an acquisition tool. But really first and foremost, a way for them to continue selling that advertising space and ultimately benefiting from that advertising.

When you look at probably what a decade ago when we were talking nonstop about Netflix and cord cutting and this was the way of the future and this is how people are going to get their content going forward, cables in trouble. The big question that stood out to a lot of us is, yeah, that's fine. I get that to an extent, but what about sports, Brian? What about news? What about people who are looking for linear television? Sports has to be linear. It's not necessarily that on-demand style that somebody distributing offerings give us. I think this is the answer today. Sports that demand. That's why we're seeing so many of the streaming services pop up, whether it's Peacock or whether it's Hulu Live or YouTube's live offering. We're seeing more and more of these offerings to be able to fill that void. Honestly, you have to wonder now, is there something that Netflix will consider in the future?

Because they are at least staying open-minded. I'm not saying they will sling ads, but they are hopefully staying open-minded to the possibility down the road as management noted recently. To me, this makes a lot of sense, majorly baseballs. I know a lot of people find it boring and it's not the most exciting thing in the world, 162 games over the course of a season. That mean they all really need a whole heck of a lot and you're probably midway through the season. Often times you get a pretty good idea of what's going to be worth watching and what's not going to be worth watching. But the fact of the matter is that MLB is still growing. It grows $10.7 billion in revenue in 2019, that was up from 10.3 billion the previous year. But if you go even to 2015, that was $8.2 billion. It is growing. I think as long as Major League Baseball continues to grow then we're going to see folks out there clamoring for that offering.

Frankly, when you look at Major League Baseball, that is just an advertiser's dream. There is so much dead air to fill through the course of one baseball game. I certainly get why Peacock would be interested in this. They're getting exclusive games that you can only get through Peacock. I think it'll be something that serves potentially as a nice little acquisition tool for them over the course of this coming year. Absolutely a lot of opportunity for brand awareness out there. You wonder how far baseball has to go, but it's America's pastime. The only real concern I would have there though, is that you look at these studies and it tells us that in the sporting world, and this is not just baseball by the way, this is something you're seeing writ large through the sporting entertainment landscape. The viewers are getting older. Now this study back from 2016 tells the tailwinds, this disparity is only growing overtime.

But from 2000-2016, the average age of the Major League Baseball viewer went from 52 years old-57 years old. I think the big nut to crack for a lot of these leagues is trying to figure out, where do we reach these younger audiences? Maybe we continue to see more deals inked with like social media companies, whether it's Snapchat or Twitter or Facebook or Meta, whatever you want to call it, but all-in-all. It feels like the sport entertainment landscape is poised to continue to run because there are so many different channels that they are claiming for the content.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: One way to better understand the business is to listen to what customers have to say. Moiz Ali is an investor and entrepreneur who knows Shopify from multiple perspectives. Visa shareholder, but he's also used Shopify for several of its e-commerce brands. He recently talked with Motley Fool senior analyst Yasser El-Shimy about his criticisms of Shopify's data insights and subscription platform, and the one-way Shopify could act a bit more like Apple. But Yasser kicked off the conversation on a more positive note.

Yasser El-Shimy: You have an investment portfolio is about 50 companies. One of those is the company we will discuss today, Shopify. What was your both thesis for investing in Shopify when you first bought shares in the company?

Moiz Ali: I've been investor in Shopify for many years now and I've probably doubled down multiple times during my time horizon or during my investment horizon with Shopify. I'm a big fan of the product. I've started multiple e-commerce businesses. One of those e-commerce businesses, a few of those e-commerce businesses have been on Shopify, it's an incredible product. It's really the only solution for SMDs right now who want to build genuine and robust e-commerce products or e-commerce stores. I'm a big fan of Shopify, user of Shopify, and I've been an investor for probably half a decade at this point, maybe longer.

Yasser El-Shimy: Well, that's incredible. But now that you mentioned competition, companies have been trying to come into the game a little bit to takeaway from Shopify's market share. You see blog, BigCommerce, maybe even Wix trying to nibble at the heels there. Do you have any kind of thoughts on what Shopify might be doing differently from those companies? Or do you think Shopify's ecosystem is replicable by other players here?

Moiz Ali: Shopify in such a moat. I guess Shopify is two things. One is that an ecosystem that's robust and that's a genuine moat against other competitors. If you want a developer, there's plenty of developers that work with Shopify systems before. There's plenty of apps that exist in the Shopify marketplace or in the Shopify app store. Shopify has a huge advantage when it comes to those types of resources. They've been around a lot longer. A lot of stores that built on Shopify and those stores have built up an ecosystem, so Shopify is robust there. I think all of the other players their functionality is so far behind Shopify that they're not genuine alternatives to Shopify's ecosystem. I think the second issue is the switching cost. It's not like any store that's on Shopify would realistically switch off of Shopify to BigCommerce or Wix or Square. The switching cost from one of these e-commerce platforms to another is so massive, it's such a massive undertaking. I know that I've done it in the past. That once you have someone and their business is working on the platform, it's virtually impossible to win that bid. It's virtually impossible for another platform to win that business. It's not like Wix or Square could create a sales team and go after Shopify stores. Those stores are on Shopify and their businesses will exist on Shopify for a very long period of time.

Yasser El-Shimy: Now you have recently written out Twitter thread that went viral, if I may say so myself. You started it with this statement, Shopify's mission maybe to, "Arm the rebels, but it is giving us muskets in a world that is increasingly being fought with machine guns." Can you elaborate on that?

Moiz Ali: Sure. Shopify is head and shoulders above BigCommerce, Wix, and Square when it comes to supporting SMDs. They do things that all of those SMDs still fail to do and as a result everyone's still using Shopify for e-commerce. But Shopify has really improved its platform in the last five years. For instance, five years ago brands could just rely on really cheap Facebook ads and really cheap digital advertising to drive traffic to their stores and build a successful small business that generated two million dollars in revenue and $250,000 in EBITDA. That has become much harder today because digital advertising has become much more intense. iOS changes that have disrupted Facebook's ability to target. There are always new headwinds in e-commerce. Shopify could have adopted their platform over the past five years in order to improve their platform and arm the rebels. A few of the option or a few of the things that I mentioned in that Twitter thread was Shopify analytics. Stores get larger and stores are no longer able to buy cheap digital advertising. They've got to become better with the ads that they've got and they've got to do a better job with retention. Shopify analytics are really terrible. They say, here's your revenue for today. Here's how much of that revenue came from returning customers and that's about it. There are other great platforms right now that exist like Triple Wheel, for instance, that have done a good job plugging up the holes that Shopify has. But Shopify needs to improve its genuine internal analytics so that every e-commerce entrepreneur can benefit, not just those that use Triple Wheel.

Yasser El-Shimy: Can you give us some specific examples of analytical tools?

Moiz Ali: Yeah, absolutely. For instance, retention. I am an investor in a lot of e-commerce businesses, and a lot of e-commerce entrepreneurs don't understand what retention and returning customer rate. They'll look at their revenue today and they will be like, OK, we did a $100 of revenue today, $30 of that revenue came from returning customers, so we have a 30 percent repeat purchase rate. That's not the way you should look at it. You should look at it as OK, it's March 2022. How many of my customers from March 2021, in the past year ago, how many customers that I acquired in March 2021 had purchased my products again. That's how you look at retention. You look at it on a cohort basis. How many people who purchased a year ago made another purchase? Shopify doesn't enable you to look at retention that way. They only look at it as you got 30 dollars of revenue from customers that you've acquired in the past. You've a 30 percent repeat purchase rate. That 30 dollars as meaningless. Did the customers that I bought or acquired in March 2021, did 70 percent of them repeat? In which case I have got a great business. Did five percent of them repeat? In which case I've done a struggling business; that type of information, really arms the rebels. They're just giving us muskets in a world that's being fought with 21st Century technology.

Yasser El-Shimy: One of the things you mentioned in your Twitter thread is that Shopify does not provide adequate subscription support to its merchants. Can you please tell our listeners what kind of Shopify subscription support you would like to see?

Moiz Ali: Sure. Let me provide a little bit of context here, I started a company called Native, which is a deodorant business. We at one point were on Shopify, or Native is on Shopify today, we used Shopify. Shopify did not have its own Native for lack of a better term, subscription service, so you had to use an app and the app we use is called the Recharge. For a long time Recharge was the only player in the game. They were the only guys who really supported subscriptions. Now there is a bunch of smaller players that are trying to do a good job here. The reality is, the subscription service within Shopify is absolutely horrible. Recharge's checkout used to take you to another checkout page, it was really long and complicated. Recharge's analytics are awful, Recharge's prices are awful. There is if you looked at NPS scores, Recharge's NPS scores would be the equivalent of Comcast NPS scores. Nobody wants to do business with them, but everybody has to because they are the only ballgame in town and you need to have subscriptions supported by Shopify. It boggles me, it boggles the mind as to why Shopify has not yet created its own native subscription platform.

So many Shopify merchants use it and so many Shopify merchants are disappointed by it. It really is incumbent on Shopify to build that type of software and their businesses. I remember ritual.com is this amazing multivitamin business built in LA. They were on Shopify. There were a subscription-only business and at some point, they got to a size where they were like look, Recharge isn't able to support the size of the business. Shopify doesn't provide us the tools to be able to do this ourselves. We're going to leave the Shopify platform and move to our own platform because we need more customization than Shopify and Recharge allow us. I think it really behooves Shopify to build its own subscription app and make it Native to the Shopify platform and support it with its own engineering resources instead of having such a critical element of so many businesses rely on an app that everybody hates.

Yasser El-Shimy: Now, I know that. Toby. Thank you for the Twitter thread. Do you see any evidence of Shopify, taking the critique seriously and actually taking steps to rectify the situation or not yet?

Moiz Ali: The Twitter thread is, I don't know, maybe less than 30 days old. I think it's too early to tell there. I recognize that Shopify is in a really difficult spot. In the same way that Apple was, which is, you want a foster a really robust developer community, including app developers that make apps that live on the Shopify platform and Shopify app store, and you don't necessarily want to kill your developers by releasing the services or releasing the products that they offer as apps themselves. Shopify is in a really tough position in that they're like, look, we want this robust developer community, but we also need to build things ourselves to make Shopify a better platform. I think that they are in the past, they've been hesitant to step on the toes of their developer community and be like, you know, what the subscriptions are being led by developers that are third-party apps and that's perfectly fine. The problem is, in order to make an amazing platform, you need to do things natively at some point. Apple at one point didn't have a flashlight app. You had to download an app or pay for it in order to have a flashlight, and Apple's like this is crazy, we can't do this. We need to build this natively into the iPhone and it was done, and all the Apple App Store companies that were making flashlight apps went out of business because it was natively supported by Apple. Shopify needs to do that. They need to start stepping on more toes of app developers because they need to make their platform better. If they don't, they're going to struggle and there will finally be room, or there may be room for third-party competitor to finally the compete with Shopify.

Yasser El-Shimy: Speaking of Apple the important as it is to have a vibrant app store. The value that's created by vertical integration cannot be understated or overstated in this case. It's just a better experience for consumers, it's a better experience for the product, it drives more value for the company overall. I think you've definitely on the right track here. One thing, since we're talking about Apple, we know that they have recently clamped down on App platform companies like Meta and others with the recent changes in tracking and targeting for advertisement. To what extent do you see this as a potential threat to Shopify's business model?

Moiz Ali: I don't see it as a threat to Shopify's business model. I guess Shopify's business model can be improved in so many ways. They can start eating some of the software that their app community has and internalize that revenue instead of letting it be externalized to these third-party apps. When I was running Native, we pay more to Recharge, which is stunning to me than we did to Shopify in monthly app fees. Shopify's business model can start to internalize that revenue. You can raise prices. There's plenty of things that Shopify can do to stabilize its own business model. I think the real question, it comes down to the merchants, the Shopify merchants, which is Shopify merchants in the past have been dependent on Facebook and Instagram ads in order to buy traffic. The amazing thing about selling products on Amazon is Amazon gets so many monthly searches and monthly page hits that you don't really have to buy your own traffic to Amazon. You may just have to buy the traffic within Amazon. On a Shopify store, no one's going to your Shopify store unless you're advertising it in some way or another. Generally, Facebook has been that advertising platform for Shopify businesses.

It's getting tougher out there. I think that's going to make it tougher for Shopify stores to do well, which goes back to my original point, which is as digital traffic becomes harder to get and becomes more expensive, it behooves the merchant to do a better job with the traffic that they are purchasing from Facebook and Pinterest and Snap and TikTok, and as a result, Shopify needs to enable those merchants to do that and it could do that with better tools, like better analytics, better Shopify subscription apps. I still think Facebook has a huge role to play when it comes to the Shopify community. By far and away, it's still the best advertising platform. Pinterest is great, you can spend $3000 a day successfully on Pinterest, on virtually any e-commerce business. But you cannot spend $30,000 a day. On Facebook, you can spend $30,000 a day successfully. Maybe in the past, you could've spent 60,000 dollars, and now you can only spend 40 or 50. But nobody else has the scale and targeting that Facebook does, despite the fact that they took a real body blow when it came to IOS 14.5.

Yasser El-Shimy: Moiz, thank you so much for spending your time with us today and for sharing your insights on Shopify.

Moiz Ali: Thanks so much for having me, really appreciate that.

Chris Hill: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.