Shopify: Bull vs. Bear

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

• Nvidia (NVDA 4.35%) warns that second-quarter revenue will be lower than previous estimates.
• Why Nvidia's long-term thesis appears to be intact.
• A listener's question about whether to sell some winners in his portfolio.

Shopify's (SHOP 1.26%) down 70% this year. Does the former highflier have enough of a moat to fend off the likes of Amazon (AMZN 1.49%)? Motley Fool contributors Ryan Henderson and Jose Najarro join Motley Fool producer Ricky Mulvey in a bull vs. bear debate over Shopify.

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 August 8, 2022.

Chris Hill: Nvidia provides new guidance and we've got a bull versus bear on Shopify, Motley Fool Money starts now. I'm Chris Hill joining me in studio Motley Fool Senior Analyst Jason Moser. Good to be here.

Jason Moser: Good to be here and be happy Monday.

Chris Hill: Happy Monday. Not a happy Monday so much for Nvidia because Nvidia is scheduled to issue its next earnings report on August 24th. But this morning, the graphics chipmaker released preliminary earnings that shows second quarter revenue was going to be, let's just call it 15-20 percent lower than they had previously guided for, and shares of Nvidia are down about eight percent.

Jason Moser: Yes, that's an attention getter. It is a risk that comes with a business like this, when demand for a given sector slows down. We've talked a lot about companies that have pulled forward a lot of growth over the past couple of years for obvious reasons, nobody is immune. I think that Nvidia certainly realized this to an extent as well. Because this revenue shortfall, this adjustment downward is really primarily due to gaming headwinds. They've been witnessing gaming tailwinds over the past couple of years as folks have spent a little bit more time inside and doing other things. Well, now people are getting back out at it. That means that the gaming sector is normalizing a little bit.

I look at this and I understand the reaction anytime you have a company that pre-announces like this with this type of adjustment downward. It is understandable that investors fully, I think as we speak right now the stock is down around eight percent for the day. I would encourage folks that will look at this from a little bit of a longer-term perspective shocker. I know we take the long, but bear with me. It is one of those things we have to look at the market that it serves. I don't think this is a long-term red flag. Unless you subscribe to the notion that gaming itself is in secular decline. I don't subscribe to that notion. Maybe others do. I personally don't. When I look at something like this, this is just again, growth was pulled forward. It's normalizing a little bit, but this isn't really an indicator of more weakness within the business now. It'd been nice if they could have seen around this quarter a little bit, but I don't think it's something that really is indicative of a greater problem within the business itself.

Chris Hill: I agree with that. Including and especially it would've been great if they could have seen around the corner about this. In part because this is not a missed by a penny on the revenue line number. I think that's a big part of why we're seeing the reaction that we're seeing in the stock. To the long-term picture, I think part of what supports what you said is the comments from Colette Kress, who's the CFO of Nvidia. She said the long-term picture that they have for gross margins is still intact. Look, she's a pro, she's been there nine years before that with Microsoft and Cisco Systems. It's hard to imagine the gaming industry is dramatically smaller five-years from now as opposed to larger.

Jason Moser: No, I suspect it will be larger. I think all signs point to that. The good thing with a business like Nvidia is that it pursues multiple big market opportunities. When you look at gaming revenue, for example, that's the second biggest driver for the business behind the datacenter as it pertains to this guidance and the revenue for the quarter. That gaming revenue is going to be down 44 percent sequentially and down 33 percent from the prior year. Now the good thing is, as I mentioned, these other markets, you look at pro visualization, that's going to be a little bit of a point of weaknesses. Well, 20 percent declined sequentially and four percent year-over-year. But when you look at datacenter revenue, which is the largest portion of the business, that's up one percent sequentially and it's going to be up 61 percent for the prior year.

Automotive another space that is really heating up for a lot of companies in Nvidia notwithstanding here is up 59 percent sequentially and 45 percent year over year. If you remember, it wasn't all that long ago when we were talking about Nvidia, the big topic of conversation was around crypto. It was all of this functionality that their hardware and software enables for the crypto space. Then you saw some weakness. You saw some questions and we saw the same thing more or less happen here. It all just speaks back to this idea that I think when you look at a business like Nvidia and something like this that happens, it's one part of the business, but it's not the whole business. Again, I think it's something that yet it hurts for now. But given the expertise in the business, given the number of market opportunities that they're pursuing. Then also just given the fact that this technology chips, it has the lifeblood of everything that we do now. It's just non-negotiable. I think that this is a business that's just going to play a very important role in our lives and the development of our digital economy for many years to come.

Chris Hill: Our email address is [email protected]. Got an email from Adrian in Germany who writes longtime listener here. I'm in the process of adding to my winners and investing in some new companies that have had on my watchlist for some time now. But I just couldn't get myself to buy at the lofty valuations before the recent market pullback. With my portfolio growing in size, should I also consider selling some of my positions, including my latest additions, I hold over 20 individual stocks. From hereon, it will get increasingly difficult to stay up-to-date on all companies developments and my thesis for each of them. I'm curious to hear your perspective on the optimal degree of concentration in a private portfolio. Thanks and keep up the great work you do every day. Thank you for that, Adrian, and thank you for the kind comments and the question. I said when we were walking into the studio, this is a very self-aware person. This is such a great question because Adrian is so self-aware in terms of I want to stay on top of my stocks and I know there is a limit to my ability to do that. In a sense, I feel like Adrian is already answering the question there.

Jason Moser: I think to a degree, it's a very good question with an answer that ultimately is going to depend on the individual. I think that probably Adrian is probably a little bit early to this issue and that's a good thing. I think better early than late. What I mean by that is I feel at 20, a little bit more than 20 stocks in the portfolio, that's pretty concentrated. For most folks, we're recommending 25, 30 somewhere even beyond that, to really feel like you can sleep well at night and not worry about too much concentration. I do feel like there's still some room to go and adding a few more names and a few more businesses to that portfolio.

But I do agree that as you creep up past 20, it becomes a lot more difficult to keep track of what's going on. I will say certainly I've got, I think somewhere in the neighborhood of 32-34 individual companies now in my portfolio, which I consider for me a lot. Part of my problem is I just every once in a while spot a new business that I really just want to own it, so I add a little bit, and I think part of it, is trying to remember in the context family businesses you own, what are the allocations you have? Because some of those positions maybe very small and it can be OK to just say, you know what? I could just let those go and just check in on them every once in a while.

I don't have to necessarily give the same do attention at something that maintains a larger portion of that portfolio. I do think taking into consideration the actual size of the position makes a difference there. I don't know that I would sell just to be able to add a different company to the portfolio, particularly if it's a winner. I don't think that's really a good strategy. From there, we like to say water the flowers and pull the weeds. From time to time, look through the portfolio and find those underperformers and where the thesis maybe not working out or maybe the thesis even broken. You can consider unloading those businesses, but I wouldn't sell just to make room to add a different name, different businesses to the portfolio.

Chris Hill: One thing I'll add is, you said something I was absolutely thinking which is the whole look, sometimes it doesn't work out for a stock and it gets to be so small, it doesn't matter. It's less than 1.5 of one percent of my portfolio until I am not going to spend a lot of time worrying it. At the other end of the spectrum, I think there's also the possibility for businesses that are so stable even though they represent a larger part of your portfolio and it's three percent, five percent, something like that. But they are so well-run that you don't need to spend a lot of time on them either.

Jason Moser: I think that's a terrific point. I'm glad you brought that up and I could think of a couple of examples, just right off the top of my head, In my own portfolio, I look at something like an Under Armour. Under Armour clearly years ago, a much different story than it is today. I look at that. I think it's a broken thesis versus where we were looking at it years ago. But I don't think it's a broken business per se. I think there's value there, but the position that I have in Under Armour is so small that it just doesn't matter. I keep it for a number of reasons. Number 1, I just think at some point there's some value there that's going to be realized. But number 2, it's a good reminder to look at those little holdings and you remember, things can change very quickly in investing. It's nice to have those examples in your portfolio to remind you of that. Because it's also very easy to forget that stuff. Then on the other side, you have businesses that are just so stayed, so stable, so reliable. I've got to call out McCormick here because it's just one that I've owned for years and I put it in that bucket. I don't need to get too in the weeds with it because they just deliver quarter-after-quarter, a pretty consistent experience, a pretty consistent earnings report in every once in a while and they look to make an acquisition here and there. You see, keep an eye on that. But I do appreciate you bringing that point out because it's an important one.

Chris Hill: The businesses that are so stable that not that you want to ignore them. But they're so stable and so well run, that if there were some thesis-changing event, there would be no way to avoid the news.

Jason Moser: Correct. [laughs]

Chris Hill: It wouldn't be in the business section. It'd be on the front page.

Jason Moser: Absolutely. When McCormick made that RB Foods acquisition that didn't sneak under the radar. I gave that one some due scrutiny. But for the most part, that's not a standard operating procedure for a business like that. Again, it speaks to why we feel like having that diversified portfolio was so important because it affords you the opportunity to expand your horizons and own a few more companies than maybe you normally consider because some of them out there, they just don't need to be followed so closely because they're so reliable. They've got good track record.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Shares of Shopify are down more than 70 percent this year. Is this former high flier now a buy? Is Shopify's moat wide enough to keep Amazon at bay? Ryan Henderson and Jose Najarro joined Ricky Mulvey for Bull versus Bear.

Ricky Mulvey: Welcome to Bear versus Bull. We find a company, we pick some analysts, we flip a coin to see what side they'll take. Today the company is Shopify. On the bull side, we have Jose Najarro, good to see you.

Jose Najarro: Thanks for having me, Ricky.

Ricky Mulvey: On the bear case we have Ryan Henderson. Welcome back both of you.

Ryan Henderson: Thanks, Ricky. Happy to be here.

Ricky Mulvey: Let's get it started with the bull case for Shopify. Jose, you have five minutes.

Jose Najarro: Thank you for that Ricky and Shopify I think has numerous bullish points. First, I want to start off by saying that this is a company that provides numerous solutions and to me that makes it a sticky business and it's something I like to call a toolbox investment. For example, it help sellers with online, offline, inventory, logistics, finance, payments, advertisement, analytics, and the list goes on. By having solutions in numerous markets, and it allows customers to stay a little bit more within the company. Unfortunately, there are some competition and some of those competitions might hit Shopify in the logistics market. But because they have this huge selection, it allows those customers to stay. The second bullish point that I have for Shopify is the overall e-commerce market. Based on the chart from Statista, less than 20 percent of the United States total retail sales comes from e-commerce at the moment. There's plenty of market share for Shopify and just the overall e-commerce market to grow.

When we take a closer look at that e-commerce market exposure, Shopify is actually number 2 with roughly 10.3 percent of total market share. Numerous things can happen. One, either the overall e-commerce market share, can grow as a whole in the United States, which will be bullish for Shopify or Shopify itself can just increase its overall market share within the e-commerce market. Again, either scenario would be a win-win for Shopify. If we take a closer look, many people believe Shopify is just for an e-commerce market, but they also provide numerous offline markets. For example, they have adopted point-of-sale hardware and this is one of the reasons they're seeing strong gross payment volume growth across the market. They also have other payment solutions like Shopify Payments, Shopify Pay, and Shopify Markets.

Even though they're mainly known for their e-commerce market, they also have numerous solutions for the offline market. Outside of the offline market, they do have numerous international expansions happening at the same time. For example, most recently they launched Shopify Payments and Shopify Shipping in France. This is actually going to be, I believe one of the 18th country to be with Shopify Payments. They also launched their Shopify point on system, which is their integrated payment in Italy in June and in Singapore in July. Now, Shopify point-of-sale system hardware is available in 13 countries. They're also localizing subscription pricing to over 200 countries and that's super important to do because what pricing might work in certain country might not work in another. They're trying to make sure that they have everything set in line. Outside of just the international market exposure, they also have a very strong balance sheet. Right now they roughly have roughly seven billion dollars in cash in short-term investments and about $900 million in long-term debt.

Outside of that strong balance sheet, they do have good partnerships and they are increasing their overall integrations. For example, most recently they did YouTube Shopify, which allows content creators to link their stores to their videos, and this opens up a huge opportunity for gross market volume. As a YouTuber creator myself, I only had one option available to me before, but with Shopify solutions it's so much better and this is something I personally, I'm going to start using pretty soon. They are also expanding into other integrations like with Twitter and Spotify and more importantly, they're also entering into the crypto market. For example, they allow stores to connect to a crypto wallet and can have the store for only certain communities that hold that certain NFT. Obviously, NFTs are a very tricky subject to talk about, but it is something that is seeing some form of exposure at the moment. We can see Shopify is trying to stay on top of the trend and grow the overall gross market volume and the overall transaction on their solutions. These are the numerous reasons that I believe Shopify can be a strong bullish point in the long-term of things.

Ricky Mulvey: That's the bull case from Jose Najarro. Jose, thank you so much for that. On the bear side, crossing over from the Chit Chat Money Podcast, it's Ryan Henderson. Ryan, you have the bear case whenever you're ready.

Ryan Henderson: My bear case sits around the idea that a lot of investors seem to think Shopify is well loved by a lot of investors and I think a lot of people tend to think it's a very good business model and there is some validity to that where you spend tons of time and money upfront to build this software. It met a very critical need for a lot of people and it doesn't require a giant sales force to sell it. Once you get a certain level of adoption, there's a lot of profitability that can come with that. However, I think Shopify lacks sustainable competitive advantages and we're beginning to see the repercussions of that. First off, I have two primary reasons. But the first one is that other content management systems and for anyone that doesn't know, a content management system is what Shopify is, but it's software that helps people create and manage content on a website. Think Wix, Squarespace, Weebly, companies like that, and Shopify as well.

Other content management systems are gaining market share while Shopify is losing share currently. Year-to-date, from the start of this year to now Shopify's market share among CMS providers has declined from 6.6 percent to 6.2 percent. While Wix and Squarespace, which are the two closest in terms of market share have both gained, they've gone from 2.9 percent to 3.4 percent Wix's case and 2.7 percent to three percent for Squarespace. Now, part of that is that the other two platforms lend themselves to other verticals, whereas Shopify is hyper-focused on e-commerce. There's the recent reversion or retraction in e-commerce spend has hurt Shopify disproportionately. However, those companies still offer a lot of e-commerce capabilities. You can run a shop on Wix as well and now you can easily plug into Amazon's fulfillment network, which leads into my second, I guess, bearish point is that Amazon did something that's really, I think, problematic for Shopify down the road.

They recently launched a feature called Buy with Prime. For anyone that doesn't know Buy with Prime allows Amazon Prime members, which about half of Americans are Amazon Prime members, to access Prime's best-in-class shipping and fulfillment capabilities via stores outside of Amazon. If you're a store owner or you're operating a store on Shopify along with your other payment features that you can provide, you can also give Buy with Prime. If you're a customer and you see Buy with Prime, you think, "I can get next day delivery, free shipping and free returns on select items. I've had that experience before. I'm familiar with that. I trust that service. I'm going to go ahead and do that. That is a giant chunk of Shopify's revenue where that's being cut out. If the payments and fulfillment side, which is, for reference, there's two ways that Shopify generates revenue subscriptions and merchant solutions. Merchant solutions is mostly accepting payments, shipping and fulfillment, and then securing working capital. That's 72 percent of their revenue.

If Amazon is now interfering there and taking the payments and fulfillments even on Shopify's website, that's a giant chunk of revenue and that's going to be a headwind for Shopify. If you've got Shopify today trades at about, I believe it's just under 10 times their trailing revenue. There's a real chance that revenue starts to run into some problems here if they're coming up against competition from Amazon, even on their own sites. It seems like a lot to pay. I know Shopify's trying to combat it with some of their own spend. I think Shopify is trying to become Amazon quickly and they're spending, I think with $500 million in capital expenditures to build out their fulfillment. Amazon spend 60 billion a year in CapEx. I don't think Shopify can compete on fulfillment with Amazon. There's other ways that Shopify can generate revenue, but that's a giant chunk of their top line being cut out for a company that's trading at a bit of a premium. I just think there's other places where investors should be looking right now.

Ricky Mulvey: Ryan Henderson, thank you for the bear case. Jose Najarro thank you for the bull case. You can decide who made the better argument. We'll have a poll up at Motley Fool Money on Twitter. Very important that you go there and cast your ballot because the winner of today's Bear versus Bull is getting two tickets to Bitcoin the Musical. That's right. Music by Seth Green starring Pitbull. It's three-and-a-half hours long and it is in Miami, we will not pay for your travel there. Thank you so much.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and 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.