Shopify Stock Is A Black Friday Beneficiary That Faces Key Test In Q4

Posted on December 9, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 5, 2024,06:10pm ESTForbes on Dec 5, 2024,06:10pm EST

Black Friday and Cyber Monday e-commerce sales broke records again this year, with Adobe pointing out that US sales increased 10.2% YoY to $10.8 billion on Black Friday while Cyber Monday sales rose 7.3% YoY to ~$13.3 billion. Peak sales hit $15.8 million per minute on Monday evening.

Shopify is a major beneficiary of Black Friday sales, and coming off a strong Q3, saw another record-breaking holiday. Shopify’s growth was quite strong at two times higher than overall Black Friday sales, with GMV increasing 22% YoY to a record $5 billion. For Black Friday/Cyber Monday, GMV rose 24% YoY to $11.5 billion with peak sales hitting $4.6 million per minute.

Q3 was strong with revenue growth accelerating to 26% YoY, operating income more than doubling YoY and FCF margin approaching 20%, the true test will be Q4. Shopify will need to prove to the Street that it can continue to re-accelerate revenue into 2025 given the strong Black Friday trends and international expansion efforts.

Shopify Revenue Growth Reaccelerates in Q3

Shopify reported a strong third quarter earlier in November, with revenue growth reaccelerating more than 500 bp sequentially. Q3 revenue increased 26.1% YoY to $2.16 billion, with growth accelerating from 20.7% in Q2. Excluding logistics (comps from Q2 23 to Q2 24), Q3 was the sixth consecutive quarter with revenue growth of >25%.

For Q4, management guided revenue growth in the mid- to high-20% range, benefiting from the holiday season and building upon Q3’s growth. Given the recent data on Black Friday sales, Shopify is well on its way to deliver on this guide.

Shopify's revenue growth reaccelerated in Q3 after decelerating for five consecutive quarters. Source: I/O Fund

Shopify pointed out three key drivers of revenue growth and strength in Q3:

Strong GMV growth
Subscription Solutions revenue growth
Increased Payments penetration

I break these key points down for you below.

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick hereClick here

GMV Driven by European Growth of 35%

International helped to drive the beat this quarter, with GMV “outside North America growing 33% in Q3. European GMV grew greater than 35% as our largest markets of the UK, Germany, France, and the Netherlands continue to gain traction.”

Global GMV increased 24% to $69.7 billion in the third quarter, the fifth quarter in a row where growth exceeded 20%. This was driven by same-store sales growth by Shopify and Shopify Plus merchants (organic growth from existing stores), as well as that international strength. Shopify Plus is tailored to large and enterprise businesses, offering exclusive conversion and automation features and lower fees to help drive growth for those merchants.

Additionally, Q3 offline GMV was up 27% YoY, and has more than doubled in just the past three years. Q3 B2B GMV grew over 145% YoY, and has now had five consecutive quarters of triple-digit growth. This shows Shopify’s diversity ability to grow beyond digital stores for small-to-medium sized retail customers, which had driven the bulk of the business during the stock’s Covid surge. The expansion into Europe also shows promising signs of Shopify’s ability to scale globally in a more meaningful way. The company stated they “made enhancements to localization, shipping, and compliance, and are pairing that with intensified marketing efforts” for Europe.

Black Friday was also strong and an early indicator for Q4, with Shopify recording $5 billion in GMV for the holiday, a 22% YoY increase, in-line with last year’s growth. Deutsche Bank analysts noted that this GMV puts Shopify on track to hit Q4 GMV expectations of $92.8 billion, correlating to a 23.6% YoY increase, about in line with Q3’s growth rate.

To note, GMV growth of 24% lags revenue growth of 26%. This is not necessarily a negative; however, it does hint that customer spending could be slowing slightly, and a further decoupling of the two rates could suggest a revenue re-acceleration may be short-lived if this decoupling continues.

Subscriptions: MRR Accelerates 3-Points

Shopify’s Subscription Solutions revenue, the second stated driver of revenue growth, increased 26% YoY to $610 million, and represents 28% of revenue. Growth has decelerated from 34% YoY in Q1 and 27% YoY in Q2, but MRR trends point to growth stabilizing around 26% or reaccelerating slightly come Q4 and into 2025 with some pricing and merchant growth tailwinds.

In Q3, MRR growth accelerated 3 points to 28% YoY, up from 25% in Q2, reaching $175 million. Plus contributed 31% of MRR, flat with last quarter, while Plus, Standard and Point of Sale all saw “continued growth” in Q3.

In Q3, MRR growth accelerated 3 points to 28% YoY, up from 25% in Q2, reaching $175 million. Source: I/O Fund

Shopify Payments up 31%, Shop Pay up 42%

Shopify Payments facilitated $43 billion in GPV in Q3, up 31% YoY, with penetration rising to 62% of GMV (compared to 58% last year). Shop Pay similarly increased 42% YoY to $17B in GMV. Management attributed the strength in payments to a few factors: strong performance of merchants utilizing Payments, more of which are Plus subscribers, higher global adoption of payments; and increasing penetration of Shop Pay.

For Q4, Payments are likely to provide a headwind down the line, due to holiday season dynamics. In Q3, the lower margins on Payments came from a higher mix of Shopify Plus merchants, which are larger enterprises at a fixed rate, and due to a higher mix of credit card usage compared to debit card usage. Shopify explained that Q4 “sees a higher percentage of revenue from Payments given the high-volume holiday selling season,” and as a result, management expects “higher dollar losses on Payments” due to that volume growth.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more hereLearn more here.

Q4 Earnings Pop May be Short-Lived

Analysts are forecasting that Shopify regresses back towards revenue growth in the 20% range by FY25. Currently, Shopify is estimated to report 27.2% YoY growth in Q4, supported in part by 24% YoY growth in Cyber Week GMV. This would mark a sequential acceleration of 110 bp, and 360 bp faster growth than the 23.6% recorded last Q4.

Analysts are forecasting that Shopify regresses back towards revenue growth in the 20% range by FY25. Source: I/O Fund

Shopify’s revenue growth is more correlated to GMV growth now as opposed to 2022 and early 2023. For example, Shopify was reporting revenue growth rates >10 percentage points higher than GMV growth due to GPV growth, pricing and merchant revenue growth.

By Q4 2023, revenue growth became much more closely tied to GMV – Shopify reported 23.2% GMV growth in that quarter and 23.6% revenue growth, and in Q1 2024, GMV growth was 22.8% versus revenue growth of 23.4%. However, Q3 showed a larger decoupling of the two, with GMV growth of 24.0% lagging revenue growth by more than 2 percentage points.

Q3 showed a larger decoupling of GMV and revenue growth, with GMV growth of 24.0% lagging revenue growth by more than 2 percentage points. Source: I/O Fund

This suggests that if GMV growth begins to peak in Q4 and decelerate, revenue growth may soon follow if Shopify cannot push GPV growth to >30% or pull additional levers such as pricing to maintain a high-20% revenue growth rate.

To point out, analysts currently expect GMV growth of ~23.6% in Q4, again much slower than the 27.2% estimated revenue growth rate, though increased Payments volume will play a role in that. Moving into 2025, if GMV trends towards 20%, there’s risk that revenue growth will follow.

These are a few things that I’m watching for as I continue to evaluate Shopify. I provide weekly deep dives, real-time trade alerts and weekly webinars to evaluate positions and discuss potential entries and exits. Learn more here.

Executing Well with 132% Growth in Adjusted Operating Income

Shopify is executing very well despite margin headwinds, driving operating income growth well in the triple digits despite contracting gross margins in Q3.

Corporate gross margin contracted 90 bp, dropping from 52.6% last year to 51.7%, weighed down by Merchant Solutions (accounting for 55% of gross profit dollars), where gross margin contracted 130 bp to 39.7%. Management added that Payments had an adverse impact to Merchant Solutions’ gross margin for two reasons: it accounted for a larger portion of revenue, while it also had lower margins due to higher Plus merchant mix on a fixed rate and a higher credit card mix compared to debit cards.

Despite the headwinds to gross margin, Shopify’s cost optimization efforts are bearing fruit. Gross profit increased 24% YoY, or $217 million in dollar terms, while operating expenses increased just 7% YoY, or $56 million in dollar terms. This drove a 132% YoY increase in adjusted operating income from $122 million in $283 million, or 13.1% of revenue. This led to a 99% increase in adjusted net income, excluding equity investment impacts.

Q4 is expected to see this dynamic continue, despite more margin headwinds. Based on management’s guidance, gross margin is expected to contract 3.2% QoQ and 1.1% YoY while operating income is projected to increase 2.8% QoQ and increase 2.5% YoY.

Shopify Stock Has Potential Catalysts Ahead

Shopify has a couple catalysts ahead, one in moving upstream to capturing more enterprises on the platform, and the other within AI and automation features facilitating daily workflows for merchants.

In Q3, management highlighted that the quarter was “an exceptional quarter in terms of new enterprise-level brands” from all verticals coming to Shopify. Management said that enterprise “is a massive opportunity to build for the long term,” with the opportunity only beginning to bud, with just 16 enterprise launches in Q3.

Shopify believes it offers a value proposition for enterprises to switch to its platform due to flexibility and speed. To demonstrate this, management explained that “one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes, a task that used to take hours if not days. This significant reduction in data migration hassle is a big deal as it removes major friction point for merchants looking to move to Shopify.” Migrating over more enterprise brands in the coming quarters can provide tailwinds to both GMV and GPV, bringing more sales and more payment transactions to the platform.

The data migration point ties hand in hand with another catalyst for Shopify, arising from AI and automation features. Shopify is working on improving merchant automation, from data migration to inventory management and more. Shopify Flow, which is Shopify’s low-code workflow automation app that empowers merchants to build custom automations has been improved with 304 new actions in the API. Shopify Inbox is now utilizing AI to assist merchants in quickly responding to customer inquiries, while new automations for tax filings and VAT were added to Shopify Tax.

Shopify is also implementing artificial intelligence to drive higher levels of personalization for customers, and in turn, drive higher value for merchants. President Harley Finkelstein explained Shopify thinks “search and AI together makes the Shop search way more relevant, way more personalized,” and that “the change that we've made, in some cases, have led to an 18% increase in sessions where a buyer engages in a recommendation with our new home feed.”

To that extent, Shopify announced that Mikhail Parakhin recently joined as CTO, after spending more than a decade at Microsoft helping to launch Copilot and spearheading search and AI innovations at Yandex. Shopify said that Parakhin “brings a wealth of experience in AI and search technologies” and “in just over two months since he joined us, he has already made a significant impact enhancing our products.”

Technical Analysis:

As long as any weakness can hold $89.95, I expect the uptrend to push into the $132 region and then the $150 – $190 region. If any further weakness cannot hold $89.95, then the odds SHOP will push higher go down significantly. It is well above this level, so we should continue to look higher.

As long as any weakness can hold $89.95, I expect the uptrend to push into the$132 region and then the $150 – $190 region. Source: I/O Fund

Once it gets to the $132 – $190 region, what next? This is where SHOP gets a little tricky. The larger uptrend off the 2022 low has unfortunately been quite messy. This opens the door to several potential larger patterns in play. What my firm can say with a higher degree of confidence is that if SHOP can break above the $190 region and do so on elevated volume and in a direct manner, it will favor the more bullish interpretation of what is potentially playing out.

However, if it fails to breakout over the $190 region, and instead see a larger pullback from the $150 – $190 region, then we will likely see a notable correction before pushing higher. We really will not know what is in play from a technical analysis perspective until we get into the above target range and see what SHOP’s price does next.

Conclusion

Shopify has performed well despite gross margin headwinds, as prudent cost optimization efforts are leading to significant operating leverage. Q3 demonstrated this with triple digit operating income growth despite gross margin contracting nearly 1 percentage point. Although this dynamic along with strong growth is expected to continue into next quarter, ideally I’d want to see GMV keep pace with revenue growth into 2025.

Analysts seem to agree with next year consensus showing growth exiting next year at 21.2%. Although the near-term catalyst is strong Black Friday performance, likely leading to strong holiday performance (we will see), the medium-term catalysts are found in global expansion, increased enterprise mix, and placing more focus on AI and automation features to help merchants increase productivity and drive more sales.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

Nvidia’s Stock Has 70% Potential Upside For 2025Nvidia’s Stock Has 70% Potential Upside For 2025
Nvidia Stock Is A Buy On Dips Before Blackwell Arrives In 2025Nvidia Stock Is A Buy On Dips Before Blackwell Arrives In 2025
AI Spending To Exceed A Quarter Trillion Next YearAI Spending To Exceed A Quarter Trillion Next Year
Palantir Stock: How High Is Too High?Palantir Stock: How High Is Too High?

Shopify’s New Margin Profile

Posted on May 15, 2023June 30, 2026 by io-fund

Shopify was once a market darling yet has been in the penalty box over its margins for some time. Independent of the market’s very positive reaction to the news, it’s a good idea to revisit Shopify and determine what the new gross margin may look like and also what risks remain. Below is a link to the most recent webinar that details why we are in wait-and-see-mode with Shopify as the technicals are not providing the setup we are looking for right now. However, should we get the right setup, we want to be ready with a clear fundamental outline of what to watch for.

Shopify Over the Past Year:

Shopify greatly benefited from the ecommerce boom during Covid, with revenue rates accelerating to 90%+ growth rates and GAAP operating margins of 12%. Like many management teams, starting in late 2021-2023, Shopify came under pressure for investing in growth. The market was particularly concerned with the company’s investments in distribution, such as the Shopify Fulfillment Network with costs of $1B and the acquisition of Deliverr for $2B.

This acquisition came at a bad time as Deliverr increased stock-based compensation (SBC) when the market was growing concerned with SBC across the board. Stock Based Compensation increased from $151 million in H1 2021 to $257 million in H1 2022. The company stated that SBC plus payroll taxes is at $750 million for the full year. This number was later revised to $575 million for the year.

Shopify Fulfillment Network

In order for Shopify to continue to scale and take on Amazon, Shopify pursued building fulfillment centers to provide two-day shipping to 90% of the US population. This expansion front-loaded costs with management stating they do not expect to recognize the benefits of scale until ~2024.

Furthermore, management explained on previous earnings calls that they expect 100% of their gross profit in 2022 to be reinvested into growth initiatives over the next few years, signaling that OpEx and CapEx will equal gross profit, which will limit earnings growth. Shopify also had stated that it expects to hire more engineers in 2022 compared to 2021, “despite an exceptionally competitive market for top talent.” These expectations for a rise in expenses in the near term, during an inflationary environment caused a landslide in Shopify’s stock price.

Moreover, management left analysts in the dark when questioned about the ROI and payback of its Shopify Fulfillment network (SFN) investments. Specifically, CFO Amy Shapiro responded to an analyst question about SFN payback by stating that “we're not going to get into the details of how we view payback ROI [for SFN]. But what we can assure you is, we've always been strong allocators of capital to the right opportunities to grow the various parts of the business at the right time, and this is no different.”

The market does not like uncertainty and the lack of commentary about the cadence of ROI on its SFN investments also pressured its valuation.

Over time, it became apparent that Deliverr was dilutive to gross margin as management stated the 46% gross margin in Q4 was due to “Shopify Payments and Deliverr.”

Reduction in Capex Costs and 20% Headcount Cuts

Shopify announced plans to layoff 20% of its workforce following a previous announcement the company was reducing 10% of its workforce. This is roughly 3,000 employees.

The company is also selling its logistics business to Flexport for 13% equity. Flexport was last valued at $8 billion so the equity is worth about $1 billion. Shopify acquired 6 River Systems for $450 million and Deliverr for $2 billion, which are part of the equity exchange.

According to Shopify’s management team, the goal for SFN was to spend a total of $1 billion by 2024. Through 2021, the company had spent $117 million. In Q2 of 2022, an analyst asked the Shopify management team if they had plans to exceed the $1 billion investment in Shopify Fulfillment Network and the CFO said there are no plans to expand that amount at this time.

As of Q3, the company had $4.9 billion in cash.

Merchant Solutions Versus Subscription Solutions

Merchant Solutions is a lower margin business at 37.2% gross margin and is 75% of the company’s revenue and is also growing at a higher rate than Subscription Solutions.

In the current quarter, Merchant Solutions was at 31% growth for $1.1B in revenue compared to Subscription Solutions at 11% growth for $382M in revenue. Previously, Shopify had a gross margin in the 55% range. The total gross margin today is 47.5%. The Cost of Goods Sold is 53% of revenue compared to COGS previously of <45% or revenue. Notably, COGS inched upward to the 49% range prior to the Deliverr acquisition closing. This is likely due to Shopify Payments.

The Deliverr acquisition was announced in May of 2022 and was completed in July of 2022. Meanwhile, Shopify reported softer gross margins prior to this date.

My understanding is that Stripe fees and credit card fees weigh on the Shopify Payments business. Per the company: “And within our Shopify Payments business, we continued to see gross margin pressure due to the greater mix of Plus and higher mix of credit cards versus debit cards compared to Q1 last year.”

The company also stated the following about the gross margin in the upcoming quarter: “Q2 gross margin percentage is expected to be similar to our Q1 gross margin percentage with the expected benefit from the pricing changes to be offset by the pending sale of our logistics business and the continued growth of Shopify Payments, which is a lower-margin business.”

Within Merchant Solutions, the lower margin Shopify Payments is a major contributor to the company’s growth: “Q1 Merchant Solutions revenue was $1.1 billion, increasing 31% year-over-year or 33% on a constant currency basis, driven by the increase in GMV, continued penetration of Shopify Payments and the contribution from Deliverr. $27.5 billion of GMV was processed by Shopify Payments in the first quarter, 25% higher than in the first quarter of 2022. The penetration rate of Shopify Payments as a percentage of GMV was 56% for the quarter versus 51% in Q1 of the prior year.”

More on Q1 Earnings Results

Revenue of $1.51B beat estimates by 5% and EPS of $0.01 beat estimates of ($0.04). The company doesn’t offer guidance yet said they expect Q2 to “grow at a similar rate” as Q1 on revenue growth and gross margin to also be similar. That implies revenue growth of 26% in Q2 and gross margin of 48%.

The company expects operating expense dollars, when excluding one-time items related to the planned sales of their logistics business and severance, to decease by mid-single digit percentage compared to operating expenses in the first quarter of 2023.

Notably, analyst consensus is that Shopify exits the year with revenue growth of 16% but with the expectation that Shopify will be profitable on an adjusted basis into the foreseeable future. The last few quarters, adjusted EPS has been negative.

In addition to the news that Shopify is spinning off the Shopify Fulfillment Network and reducing headcount by 20%, the company also reported an acceleration in key metrics.

Primarily, gross merchandise volume (GMV) was up 15% this quarter to $49.6 billion, or 18% on a constant currency basis. This compares to 16% on a CC basis in the year ago quarter.

Gross payments volume also grew to 56% of GMV at $27.58 billion, up from 51% of GMV in the year ago quarter.

The attach rate, which is defined as revenue divided by GMV, was at 3.04% compared to 2.79% in the year ago quarter. This translates to merchants buying more products and solutions from Shopify and was the highest attach rate the company has ever reported.

Will Margins Continue to Improve After Logistics is Sold Off?

Margins this quarter were weaker across the board:

Gross Margin was 48% down from 53% in the year ago quarter
GAAP operating margin of (13%) was down from (8%) in the year ago quarter
Adjusted operating margin of (2%) compares to +3% in the year ago quarter
Adjusted net margin of 1% compares to 2% in the year ago quarter

In the chart above, Shopify’s GAAP operating margins reached (-15%) in Q2 of last year and bottomed out at (-25%) in Q3 before rebounding to (-11%) in Q422 and dipped back down to (-13%) in Q123.

Based on management’s Q2 sales, gross margin and operating expense dollars commentary, we calculated how this could potentially impact GAAP operating Margins next quarter. We came out with a range of between (-10%) to (-5%). The upper end of the range will be reached if Shopify is able to attain its sales target. If so, GAAP operating margins, while still negative, will improve dramatically compared to Q123 if (-5%) is reported.

And if they do, the next question will be if Shopify can reach positive GAAP operating margins in the 2nd half of 2023? To provide some context, the last time these margins were positive was in Q4 of 2021 when it reached +1%.

Despite efforts to reduce operating expense dollars, much of the margin improvement will still be dependent on future sales growth, which is hard to predict given the current macro environment. It will also be dependent on product mix, per the analysis above.

For 2023, the blue sky scenario is if Shopify can hit the upper range of the implied GAAP Operating Margin in Q2 of 2023 and indicate it’s moving closer to positive margins by sometime in 2023/early 2024.

Given the price action post the Q1 earnings release, it appears the potential significant improvement in GAAP operating margins from Q1 to Q2, coupled with the divesture and short covering has likely been reflected in the stock price for the time being.

Cash Flow:

The company had operating cash flow of $100M in the most recent quarter for a margin of 6.6% up from (2.1%) in the year ago quarter.
Free cash flow margin was 5.7% up from (3.4%) in the year ago quarter.
The company has $4.9B in cash with $914M in debt.

Valuation:

Shopify has certainly traded at a higher valuation but not for about a year. The market will need to decide if 2022 valuations are the new norm or if the market can march higher based on historical valuations.

Conclusion:

As stated, the optimism that surrounds the Logistics business being sold off has not addressed the fact that Shopify Payments is a lead contributor to growth and continues to weigh on the gross margin. We will use a blend of fundamentals and technicals to help with our timing as this company is sensitive to the economy due to exposure to consumer spending and small to medium sized business (SMBs).

Please reference the last Advanced webinar here for our buy plan and technical setup.

Shopify Q3 Review and 2022 Outlook

Posted on December 21, 2021June 30, 2026 by io-fund

Shopify reported Q3 results that came in slightly below expectations as consumers reverted to offline shopping during the quarter. However, growth remained robust as sales grew over 40% and YTD GMV increased to over $120 billion. Shopify also announced it is increasingly expanding into social commerce, which I discuss in greater detail below. We are bullish on Shopify and the company will remain a LTBH position into 2022.

Note: Beth Kindig contributed to this analysis

Shopify’s Q3 results

Total Q3 sales increased 46% YoY to $1.12 billion, which missed the Street’s estimate by $22 million (2%). Sales were driven by a 51% YoY increase in Merchant sales, which rose to $788 million. Merchant sales were supported by growth in GMV, which increased 35% YoY to $41.8 billion, after increasing 109% in the prior year quarter. Specifically, GMV penetration in Shopify Payments increased from 45% to 49% including from point-of-sale hardware for offline sales. Shopify’s goal with Merchant Sales was to support both online and offline with the economy reopening. The partnerships with Affirm and Global-E also contributed to this growth.

Here's an excerpt discussing this:

“Just to sort of give a little more color on point of sale because I do think Q3 was our best quarter for the retail business. Retail GMV hit an all-time high. But we are bringing Shopify as a very efficient go-to-market model to the POS industry. We're not leaning on established networks of partners, but rather we're doing this in a really efficient way. … Again, retail GMV is the second largest contributor to overall GMV behind the online store. We also saw point-of-sale with Shopify Payments continue to expand globally… Point of Sale Pro is available now across more devices like Android devices.”

Following the growth in merchant sales, subscription sales increased 37% YoY to $336 million, which slightly outpaced the 33% YoY increase in monthly recurring revenue. According to management, this is being driven by merchants globally adopting the Shopify platform. International is an area where Shopify is investing with currently 28% of purchases coming from international buyers.

While GMV growth has been strong, GMV moderately declined QoQ from Q2, as consumers shopped more offline as restrictions from Covid-19 have been eased and stimulus has dissipated. Through the first nine months of the year, GMV increased to a record $121 billion. In fact, the company pointed out that GMV has doubled over the past 16 months from $200 billion in June of 2020 to $400 billion at the beginning of October. GMV, or Gross Merchandise Volume, represents the total dollar value of orders facilitated on the Shopify platform including revenue-sharing arrangements. It helps to demonstrate the growth of Shopify’s platform and its reach. As of now, Shopify owns 8.6% of the market measured in GMV and is in second place behind Amazon, with a wide lead at 39%. Shopify’s second-place ranking excludes merchant point-of-sale which was a big driver for Shopify this year, so it’s percentage could be higher.

Looking forward, subscription sales will likely continue to be strong given the company’s high levels of deferred revenue. Deferred revenue surged 216% YoY to $378 million, or 113% of three-month subscription sales. However, deferred revenue was skewed by large amounts of non-cash considerations from new partnerships that Shopify has signed. I discuss these partnerships in greater detail below. Nevertheless, after adjusting for non-cash consideration, deferred revenue still increased 42% YoY to $137 million, which represented 41% of quarterly subscription sales, up 100 bps YoY from 40% in Q3 2020. The relatively higher level of deferred revenue positions Shopify for continued growth since it provides balance sheet support for future sales.

Continuing down the income statement, gross profit margin increased 100 bps YoY to 54%, while adjusted operating margin declined 500 bps YoY to 12% as the company ramped investments in sales and marketing expenditures. GAAP EPS surged YoY from $1.59 in Q3 2020 to $9.18 in Q3 2021 while adjusted EPS declined YoY from $1.13 to $0.81, which missed estimates by $0.41. The large disparity between GAAP and non-GAAP was driven by $1.3 billion in unrealized gains from its investments in Affirm and Global-E, which were excluded from earnings. These large gains are a direct result of Shopify’s partnership agreements, which I also discuss in greater detail next.

Shopify expands partnerships into social commerce

Shopify has expanded its reach beyond traditional e-commerce by partnering with and incubating new companies. As mentioned above, Shopify received shares in Affirm and Globe-E last year in return for cash considerations while working as a partnership, which has resulted in over $3 billion in gains in less than a year (note that not all partnerships result in equity awards).

The company has continued this trend and has announced a series of new partnerships that help expand its role into social commerce. For instance, Shopify recently announced partnerships with TikTok, Spotify and Roku ahead of the holiday shopping season. In August, Shopify announced a partnership with TikTok and introduced TikTok Shopping. Business owners will now be able to sync their product catalogues to their TikTok profiles that creates “a mini-storefront that links directly to their online store for checkout … The TikTok community can choose to shop directly from the merchant’s storefront or click a tagged product in a merchant’s TikTok video, which will take them to the merchant's online store for checkout”.

The TikTok partnership could be significant in the future as the platform is one of the fastest growing social media sites with hundreds of millions of users. This partnership should drive demand for Shopify’s merchant solutions, as well.

Shopify also announced a partnership with Spotify in October, expanding further into social commerce. Fans can now purchase merchandise, tickets and even tip artists through a Shopify integration directly on Spotify. Spotify is the largest artist platform with over 365 million global listeners, and this partnership has the potential to grow significantly as fans are increasingly spending more on their favorite artists. For example, the global average music fan increased their spending by 17% from $5.54 in 2019 to $6.49 in 2021. According to Spotify, there are over 8 million artists on the platform, which could be a significant tailwind to Shopify if they begin to set up their own Shopify integrations selling their own merchandise and tickets.

Lastly, Shopify also announced a partnership with Roku in September. Roku is launching an app that allows Shopify merchants to “easily build, buy, and measure TV streaming advertising campaigns. Roku’s addition to Shopify’s marketing solutions will become the first-ever TV streaming app available in the Shopify App Store, opening the door to small and medium-sized businesses to build stronger brands and increase revenue through TV advertising”. This unique partnership allows Shopify merchants with relatively small ad budgets to advertise on television, a medium that has typically been reserved for large companies. Given Roku’s rich user data, they will be able to help Shopify merchants better target their audience. Roku added that a recent poll showed that nearly half of “polled consumers said they have seen an ad on their TV streaming device that caused them to pause their TV and shop for the product online”. Roku’s streaming platform is quickly turning into a shopping platform, and the partnership with Shopify should benefit both companies going forward.

On top of the partnerships, Shopify also makes investments in merchants on its platform. Shopify made $394 million in cash advances and loans to merchants in Q3, up 56% YoY. Shopify Capital has grown to approximately $2.7 billion in cumulative capital funded since its launch in April 2016. These investments help merchants grow, which in turn increases GMV and revenues on the Shopify platform.

Moreover, Shopify adequately provisions for potentials losses with these loans. As shown below, Shopify’s provision for loan losses (which protect against collection risk) have vastly outpaced charge offs in 2021. This signals that Shopify is being conservative and is not using Shopify capital to juice earnings but is instead using the program to foster organic growth at the company.

Outlook

Heading into Q4, Shopify did not directly quantify its guide, which isn’t unusual for the firm as Shopify did not provide a Q4 guide last year. Rather, Shopify stated that it expects to grow revenue rapidly in 2021, but at a lower rate than in 2020 (which was a record year). Furthermore, Q4 is expected to continue to be the largest quarter in terms of revenue generation for the year but due to stimulus in Q1 and Q2, the revenue spread will be more evenly distributed across the four quarters than it has been historically.

Shopify also expects that its GMV will grow “substantially faster than the commerce market”. On the call, CFO Amy Shapero said that she expects Shopify to continue to take share of the retail market. Management also guided that it expects costs to slightly accelerate in Q4 as it reinvests back into its business by hiring more engineers to support growth. Despite the acceleration in hiring, the company expects 2021 adjusted operating income to be above the level in 2020.

Following the above description, the Street slightly lowered their Q4 topline estimates by 2% to $1.3 billion, representing a 38% YoY growth rate. However, analyst raised their Q4 estimate for non-GAAP EPS by 8% to $1.32/share. For the year, 2021 sales are expected to increase 56% YoY to $4.5 billion and non-GAAP EPS is expected to grow by 59% YoY and reach $6.34/share. While Shopify hasn’t provided guidance for 2022 yet, the Street expects sales to rise 34% next year and earnings to increase 7%. It is noteworthy that Shopify’s recent expansions into social commerce may not be fully reflected in forward estimates, which provides a potential catalyst for an upward revision in 2022 estimates going forward.

Conclusion

Looking forward, Shopify is expanding its role into social commerce and has partnered with marquee companies such as Roku, Spotify and TikTok. The company’s partnerships have resulted in large gains in the past (ie Affirm and Global-E) and should support growth of Spotify’s merchant platform in the future. The company’s financials have also been strong and Shopify appears to be positioned well to continue to report strong growth going forward.

We did not touch on the Fulfillment Center, yet this is one of the more exciting prospects for Shopify in the future, as is Shop App and more enterprise-level commerce opportunities. For instance, the company’s Shopify App store is now integrated with ERP systems from Microsoft and Oracle for major, large retailers. This is used for companies like General Mills to launch with Shopify Plus for products like Larabar, and also helps prove the sophistication of Shopify as the company seeks to take more TAM from Amazon and other competitors. We will touch on these developments in the future as more information is disclosed.

Mohawk Group (MWK)

Posted on April 28, 2021June 30, 2026 by io-fund

Mohawk Group is a technology enabled consumer products goods (CPG) company. I first covered MWK in detail here. MWK is a high beta small cap stock with a current market cap of $720M. The stock is down roughly 50% from all-time-highs as many small cap growth stocks have recently undergone a significant correction. Below, I explain why there is a favorable risk/reward proposition in MWK at this valuation.

The rise of e-commerce has made it easy to sell products directly to consumers online. This has created an enormous amount of competition among third-party sellers and a space that is ripe for consolidation. Many successful third-party sellers selling DTC (direct-to-consumer) on different marketplaces such as Amazon, Walmart, etc. lack the technology and resources to scale their businesses beyond a certain point.

Mohawk has built an efficient consumer product platform for CPG brands with its proprietary software platform AIMEE. AIMEE is the data driven AI engine that effectively supports various tasks such as market research, forecasting, pricing, inventory management, marketing & advertising campaigns, supply chain logistics, fulfillment, and more. It is impossible for many of the third-party sellers that Mohawk’s brands compete with to replicate what AIMEE is able to do.

Mohawk currently has over 1,000 SKUs across 12 brands that sell DTC primarily on Amazon, Walmart, and Shopify. The growth that Mohawk has been able to achieve speaks to the success of the AIMEE platform, as the company has nearly tripled its number of products with over $500K in sales over the last 2 years.

Source: Mohawk Investor Presentation

Mohawk leverages AIMEE to launch new products organically and acquire existing products at accretive multiples of generally 3x-4x TTM EBITDA. As previously mentioned, there are a large amount of small third-party sellers on marketplaces like Amazon and Walmart that have built successful businesses but lack technology and scalability to compete long-term. Many of these small businesses are looking for a successful exit strategy but are not big enough to be acquired by large CPG companies. Mohawk uses AIMEE to decipher which products would make successful acquisition targets and is able to integrate and onboard these new products to AIMEE in as little as 48 hours post-acquisition.

Marketplacepulse projects GMV in the 3PS (third-party seller) space to grow at a CAGR of 16.3% from 2019-2025. Mohawks plans to continue to use its accretive M&A strategy to opportunistically add new products and categories through acquisitions. There is potential for equity dilution as a means to finance future M&A deals, but it is important to understand that any equity dilution will be accretive. Shareholders should not be concerned about equity dilution at very accretive multiples because these acquisitions will unlock shareholder value.

Many of Mohawk’s acquisitions are financed through equity and/or debt. The company recently announced that it is refinancing all its outstanding debt with a $110M senior secured note at an 8% annual interest rate with warrants convertible to equity. This refinancing deal represents an improvement in funding with a reduced annual interest rate.

Financials

For the FY 2021, Mohawk is guiding for $365M in revenue at the midpoint of its projection, representing 96% YoY revenue growth. This growth rate represents an acceleration from the 62% YoY revenue growth Mohawk recorded in 2020.

In 2020, Mohawk recorded its first full year of positive EBITDA with $2.5M. The company is guiding for $32M of positive EBITDA at the midpoint of its 2021 projection, or nearly 13x YoY growth.

Management is targeting an 8%-10% EBITDA margin for the full year, a significant improvement from the 1.3% EBITDA margin the company recorded in 2020. Long term, the company is targeting a 13%-15% adjusted EBITDA margin.

Analysts are projecting Mohawk to reach bottom line profitability for the first time in 2021 with a $0.08 FY EPS estimate, up from -$0.18 in 2020. The company has seen a significant improvement in its margins over the last year and management expects continued margin improvement in 2021.

Going into 2021, Mohawk is showing strength and positive momentum in the fundamentals. Revenue growth is expected to accelerate 34 percentage points to 96% YoY while the company is guiding for 13x EBITDA growth YoY.

Analysts are projecting Mohawk to reach EPS profitability for the first time in 2021 with improving gross margins, operating margins, and free cash flow.

Analysts are currently projecting MWK to grow revenue 26% YoY in 2022. After its Q4 earnings report, MWK raised 2021 revenue guidance 12% above consensus. The company has not guided for 2022 yet, but we believe the current consensus estimate from analysts is very conservative. We believe there is great potential for MWK to guide significantly above the consensus 2022 estimate as we get into the second half of 2021.

Valuation

The positive momentum in Mohawk’s fundamentals has not translated to a higher valuation recently, as MWK stock is currently trading at just 2.2x 2021 revenue.

MWK stock has seen a significant contraction in its forward multiple over the last couple months, as it is currently 45% off its peak valuation. When accounting for forward growth and improving profitability, we view MWK’s 2.2x forward multiple as an attractive valuation.

Risks

MWK has proven to be a volatile stock since we first entered, and we expect continued volatility in the future as it is a high beta small cap stock. One of the main risks for Mohawk is that the company is reliant on Amazon’s marketplace and also competes with Amazon Basics. While Mohawk uses various channels for their brands to sell products, Amazon marketplace is the most important channel. While this is a risk, most third-party sellers are reliant on Amazon to some degree and we believe it would take anti-competitive and monopolistic strategies from Amazon to dominate its own 3PS marketplace that has over 1.9M active sellers.

Mohawk’s business model also carries a degree of execution risk. The company is currently dependent on certain key products and is reliant on the continued success of these key products in the future. However, as the company continues to diversify its product portfolio, they will be less reliant on any one product or brand and this risk will be mitigated.

There is also execution risk in Mohawk’s M&A strategy as future growth is reliant on the continuation of successful acquisitions. Mohawk cited an 80% success rate on its acquisitions, meaning there is a risk that this success rate will drop on future acquisitions.

Conclusion

At a 2.2x forward multiple, we believe these risks are more than priced in to MWK’s current stock price. Mohawk has an efficient proprietary software engine in AIMEE that has demonstrated proven success in the 3PS CPG space. 2021 is shaping up to be a breakthrough year for Mohawk as they accelerate top line growth to 96% YoY and reach bottom line profitability for the first time. We believe MWK can achieve high growth for years to come in addition to profitability, and the risk/reward looks favorable at this valuation.

Out of Favor With Investors, Poshmark Has Long Term Potential

Posted on March 25, 2021June 30, 2026 by io-fund

Poshmark sits at the intersection of three key trends: non-new, sustainability, and social e-commerce. A consumer-to-consumer online marketplace for pre-owned items, Poshmark is a fashion-oriented platform that offers apparel, accessories, beauty and wellness, footwear, home goods, toys and games, and a new pets category.

The app makes online shopping social, with a user experience similar to Etsy, Instagram, and Pinterest. Poshmark encourages users to follow each other, and like and share items for sale in users’ closets. It also offers video through Posh Stories, free virtual events known as Posh Party Live, and virtual meetups. Prior to the pandemic, Poshmark also supported in-person events.

As the largest fashion-oriented online C2C marketplace in the U.S., Poshmark’s IPO generated significant excitement. The company initially planned to offer 6.6 million shares at $35 to $39, but due to demand priced the IPO at $42.

In its first day of trading Jan. 14, the stock opened at $97.50 and closed at $101.50, with an intraday high of $104.98. The stock has been falling ever since and reached a new low March 25 when it closed under $39.

Now that the valuation has come back down to earth, Poshmark may offer a good opportunity for investors who believe the future of ecommerce will be social. Below we look at competitors, fundamental, quarterly results, market opportunity, and potential tailwinds.

Ebay Posts Record Growth

To understand the potential opportunity in Poshmark, first we need to look at one of the largest online marketplaces in the world, Ebay. As more shopping moves online, specialized ecommerce platforms like Poshmark are fighting for current and potential Ebay customers.

Founded in 1995, Ebay is the grandfather of the online auction. Like its much larger rival, Amazon, Ebay facilitates B2C and C2C sales through its website and makes money on transactions. Unlike Amazon, which has strict guidelines around used items, sellers can list almost anything on Ebay.

But it has faced stiff competition from a new generation of online marketplaces that cater to niche interests, including public companies like Poshmark, Mercari, and The RealReal, which encourage users to clear their closets to make extra cash.

In the universe of private companies, there is also a platform for every niche, from gently used children’s apparel on Kidizen to used tech on Gazelle.

After years of declining growth, Ebay may have turned a corner last year. Due to tailwinds from Covid-19 and the resulting economic lockdown, the company reported double digit revenue growth in 2020. Here are the full year 2020 highlights:

Revenue was $10.3 billion, up 19% on an as-reported basis.
Gross merchandise volume (GMV) was $100 billion, up 17% on an as-reported basis and an FX-Neutral basis.
GAAP and non-GAAP operating margin were 26.4% and 31.3% respectively.

Due to a strong holiday season, Ebay also reported strong Q4 results:

Revenue of $2.9 billion, up 28.1% YoY, beat expectations by $160 million.
Non-GAAP EPS of $0.86 beat by $0.03.
GAAP EPS of $1.12 beat by $0.48.
GMV was $26.6 billion versus consensus of $25.18 billion.
Annual active buyers grew 7% to 185 million.

Still, this pales in comparison with high growth e-commerce marketplaces, not all of which are young companies.

Overstock, founded only a few years after Ebay in 1999, grew 2020 Q4 revenue 84.4% YoY. Wayfair, founded in 2002, grew Q4 revenue 45.1% YoY. Fintwit favorite Etsy, founded in 2005, grew Q4 revenue an astounding 128.7%.

With the tailwinds from Covid looking ready to expire for Ebay, and the entire ecommerce sector, the market is dubious about whether Ebay can continue growth and beat tougher comps. Executives were upbeat in the most recent report, noting the progress the company made in executing on the three pillars of its long term vision:

Defend the core business by building compelling next-gen experiences.
Become the partner of choice for sellers.
Cultivate lifelong trusted relationships with buyers.

It is clear from the report that Ebay executives are aware of the risks to its core business from other ecommerce platforms. To execute on its strategic vision, Ebay is focusing on seasonal opportunities and non-new, including refurbished, which was a top trend for holiday shopping.

How Big is the Opportunity in Non-New?

The online U.S. resale market for apparel and footwear was estimated at $7 billion in 2019 and is expected to grow to an estimated $26 billion in 2023, according to data from GlobalData cited in Poshmark’s S-1.

A report last June by Poshmark competitor Thredup, which filed for IPO recently and is expected to begin trading on the Nasdaq March 26, valued the secondhand apparel market at $28 billion and predicted it would reach $64 billion within five years. It said the resale market grew 25 times faster than the overall retail market in 2019, with an estimated 64 million people buying secondhand products.

Good opportunities attract competition, and competition for the online secondhand apparel and accessories market is fierce.

In addition to Poshmark, Depop, Grailed, Mercari, Thredup, Tradesy, The RealReal, other notable competitors include Vestiaire Collective, a French company that recently raised $216 million in fresh funding, and Vinokilo, a German company that has not raise any venture capital and has been consistently profitable.

Luxury brands and platforms are also starting to consider controlling the lifecycle of their own products. For example, luxury marketplace Farfetch launched Farfetch Second Life in November 2020. It allows customers to trade in high-end bags in exchange for a credit to shop new collections.

Authentication is a key feature of the luxury resale market, such as designer handbags, shoes, and apparel. As part of its strategic vision, Ebay rolled out its own authentication program for secondhand watches over $2,000 and sneakers over $100 last fall.

Based on the results, it is a potentially profitable niche for Ebay, and validates part of the opportunity Poshmark and its competitors are trying to exploit. Ebay saw a double digit increase in GMV growth in Q4 versus Q3 for watches over $2,000, while sneakers over $100 grew triple digits YoY in Q4.

Investors should note that authentication has been controversial for sites such as The RealReal, an online and brick-and-mortar marketplace that offers authenticated luxury clothing, jewelry, and watches.

The RealReal has been plagued by claims in the media, and on social platforms, that fraudulent products slip past low paid authenticators and are sold on the platform. The RealReal is also being sued by Chanel, which alleges that The RealReal is selling counterfeit Chanel bags.

Poshmark has faced similar claims from users. So far, accusations against The RealReal seem to be more prevalent and much higher profile. The potential risk is real to any company that claims 100% authentic designer goods.

Tailwinds from Sustainability

Consumers are increasingly aware of the fashion industry’s impact on the environment. The U.S. sustainability market is projected to reach $150 billion in sales this year, according to Nielsen.

In Europe, 67% of surveyed consumers consider the use of sustainable materials to be an important purchasing factor, and 63% of consumers consider a brand’s promotion of sustainability in the same way, according to July 17 report from McKinsey & Company on Sustainability in fashion.

Secondhand is inherently more environmentally friendly, as it extends the life of consumer products.

Seller Ecosystem: Size is a Moat

Sellers create marketplaces by offering the products that attract consumers. That is why one of one of Ebay’s three key priorities for its long term vision is becoming the partner of choice for sellers. In a virtuous cycle, sellers create the marketplace that keeps buyers coming back, which keeps sellers engaged.

For example, of all buyers who activated on Poshmark between 2012 and 2018, 34% also activated as sellers by the end of 2019. Of all sellers who activated between 2012 and 2018, 39% activated as buyers by the end of 2019, according to the company’s S-1 Registration Statement.

For sellers, every marketplace has advantages and disadvantages. Poshmark’s fees are less complicated than Ebay’s but significantly higher:

· Poshmark. For sales under $15, Poshmark charges a flat rate of $2.95. For sales above $15, the fee is 20%.

· Ebay. Ebay has been working to simplify its notoriously complicated fees. For most categories on Ebay, managed payments customers pay 12.35% up to $7,500, plus 2.35% on the portion of the sale over $7,500.

Poshmark has been criticized for its high fees. But the company acknowledged in its S-1 the potential for future reductions:

“In the future, we may be unable to attract new sellers or retain current sellers at these fee levels, as they may choose to sell their merchandise on other platforms with lower fees. Furthermore, pricing pressures and increased competition generally could result in having to decrease fees, which could cause reduced revenues, reduced margins, or losses, any of which would harm our business, results of operations, and financial condition.”

For Ebay, size is a moat. With its gargantuan user base, that moat is not easy to disrupt. The same may be true of Poshmark, which is the leading C2C marketplace for fashion, according to data from May 2020 from Statista, a German company that specializes in market and consumer data.

Founded in 2011, Poshmark has grown significantly larger than other fashion oriented secondhand marketplaces, most of which were founded around the same time.

Notable competitors in secondhand fashion include Depop, founded in 2011; Grailed, founded in 2014; Mercari, launched in the U.S. in 2014; The RealReal, founded in 2011; Thredup, founded in 2009; and Tradesy, founded in 2009.

Mercari, a Japanese company, had 3.4 million monthly active users in 2019, according to a company press release. It can be difficult to sell on platforms with much smaller user bases, although it helps to offer desirable brand names, according to user reviews.

Some sellers dislike Poshmark’s social aspects—it creates extra work by forcing sellers to like and share items, and negotiate with potential buyers—the size of the marketplace means sellers and buyers keep coming back. In 2020, Users who spent an average of 27 minutes daily on the app continue to re-engage over time as buyers and sellers, according to Poshmark’s Q4 report.

Fundamentals: User and GMV Growth

Poshmark launched in the U.S. in 2011 with a valuation of more than $600 million. The company has an asset light model and does not own or manage inventory, as items are listed, sold, and shipped by sellers.

In May 2019, Poshmark expanded to Canada, growing its community to more than 1.4 million users in that country within the first year.

International GMV was $6.4 million in 2019, according to the company’s S-1. It grew to $32.6 million in the nine months ended Sept. 30, 2020. For each of these periods, revenue from international operations was less than 10% of the company’s net revenue.

As of Sept. 30, 2020, Poshmark had 31.7 million active users in North America, 6.2 million active buyers, and 4.5 million active sellers, according to the S-1.

Executives did not update the total number of active users or active sellers in the Q4 report. It did note an increase in active buyers to 6.5 million, a 20% increase YoY from 5.4 million in Q4 2019. Social interactions also grew 48% to 30.4 billion in 2020, according to the Q4 report.

Poshmark Active Buyers (Thousands)

Source: S-1

Poshmark doubled the number of active buyers from June 30, 2018 to June 30, 2020, which it says has been a key driver of GMV growth.

GMV in Millions

The company plans to continue growing through increased engagement, new product categories, and international expansion, starting with English-speaking countries. Last month, Poshmark launched in Australia.

Poshmark chose Australia as its first market outside of North America due to the well-established thrift shop culture, high rates of e-commerce adoption, environmentally conscious consumers, said Chief Executive Officer Manish Chandra, in an interview with Bloomberg.

Quarterly Results and Valuation

Poshmark had a market capitalization of $3.35 billion and an enterprise value-to-sales ratio of 12.60 as of March 24. The company reported Fiscal Q4 2020 earnings March 11 for the period ending Dec. 31.

In Q4, Poshmark achieved its third consecutive quarter of profitability and had revenue of $69.3 million, a 27% increase from $54.7 million in the fourth quarter of 2019, according to the report.

Income from operations was $1.6 million, compared to a loss of ($15.1) million in the fourth quarter of 2019. GMV was $387.2 million, an increase of 28% YoY from $302.1 million in Q4 2019. Quarterly GMV has increased YoY for the past 11 quarters.

Adjusted EBITDA was $4.2 million which increased from a loss of ($12.6) million in the fourth quarter of 2019. Adjusted EBITDA margin was 6.1%.

GAAP diluted net loss per share attributable to common stockholders was ($0.31). Non-GAAP diluted net income per share to common stockholders was $0.05 a share and excludes non-cash expenses related to convertible notes and warrants due to the increase in the fair market value of our common stock share price.

For the full year 2020, income from operations was $23.4 million, compared to a loss of ($49.8) million in 2019. Net revenue was $262.1 million, a 28% increase YoY from $205.2 million in 2019.

GMV was $1.4 billion, an increase of 29% YoY from $1.1 billion in 2019. GMV has increased YoY since the company was founded in 2011.

Trailing 12 months Active Buyers reached 6.5 million in the fourth quarter of 2020, a 20% YoY increase from 5.4 million from Q4 2019. The company did not update the number of active sellers. Adjusted EBITDA was $34.3 million which increased from a loss of ($37.1) million in 2019. Adjusted EBITDA margin was 13.1% in 2020.

GAAP diluted EPS attributable to common stockholders was $0.22. Non-GAAP diluted net income per share to common stockholders was $1.25 a share and excludes non-cash expenses related to convertible notes and warrants due to the increase in the fair market value of our common stock share price, and the impact from the undistributed earnings attributable to participating securities.

Cash, cash equivalents, and marketable securities were $262.1 million as of Dec. 31, 2020. During the third quarter, Poshmark issued a $50.0 million three-year convertible note which converted into 1.4 million shares of Class A Common Stock upon completion of the IPO on Jan. 14, 2021.

Guidance for Q1 2021 is $76.5 at the midpoint versus $80 million expected, with adjusted EBITDA of $1.5 million at the midpoint.

The company plans to continue executing on its four growth strategies: focus on innovation to drive user engagement, growing international footprint and capability, growth through category expansion, and deliver robust, easy-to-use, effective seller services, according to the report.

As part of that plan, in 2020 the company launched two new product categories: Beauty & Wellness and Toys & Games and launched several new features. Poshmark also completed the rollout of “Posh Stories,” the company’s first video feature which enables sellers to showcase and sell their listings with short videos and photos, released “Drops Soon,” feature that allows Poshmark sellers to pre-market items not yet available for purchase, and launched Reposh, a feature that provides users with a one-click way to resell items purchased on the marketplace.

Conclusion

Poshmark is the largest online C2C marketplace in the U.S. that specializes in fashion, in a space with fierce competition. Its success is not limited to the U.S. After expanding to Canada in 2019, Poshmark grew its community there to 1.4 million users within the first year. Users apparently enjoy the social aspect of the platform, which uses an asset light model that been profitable for the last three quarters.

The pandemic has created uncertainty for Poshmark, and the entire ecommerce sector. But with the recent expansion to Australia, and the launch of new categories and features, Poshmark has room to grow. It benefits from long term tailwinds, including an increased interest among consumers in sustainability and the rise of social commerce.

Some investors have criticized the company’s social platform, saying it is a waste of time for sellers who will leave the platform. Poshmark has also been criticized for its high fees. We think these are relatively minor complaints about a platform with a record of success.

Any company can lose market share to competitors. But Poshmark’s competitors have a lot of catching up to do. Now that the valuation has come down to earth, and sentiment with it, the stock may provide a good long-term opportunity—even if the growth is not what hypergrowth investors are used to.

Disclaimer: This article represents the opinion of the writer, who may disagree with the official position of Beth Kindig and I/O Fund. Jessica Ablamsky does not currently own shares of Poshmark but may initiate a position within the next 72 hours. Beth Kindig and the I/O Fund does not currently own shares of Poshmark. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.

Mohawk Group (MWK)

Posted on March 4, 2021June 30, 2026 by io-fund

One key area for businesses of all sizes moving forward is the ability to leverage data and incorporate insights from that data to make important business decisions. This is especially true for smaller and mid-sized e-commerce businesses selling on Amazon, Shopify, and Walmart. Many third-party sellers lack the ability to scale their businesses beyond a certain size. This is where companies like Mohawk come in with the ability to make accretive acquisitions and acquire brands with marketplace dominance to help scale these businesses.
Mohawk’s proprietary AI-based software AIMEE drives new product development, automates sales and marketing, and manages the product life cycle. The software utilizes data analysis to streamline a number of different tasks including product selection, new product launches, forecasting, marketing variables, pricing and media buying decisions in real-time, ROI tracking of investment, and more.

Mohawk has its own platform and fulfillment capabilities in place to manage the entire product life cycle from procurement and manufacturing to shipping.

Mohawk serves the rapidly expanding e-commerce and DTC markets. The company does not have many limitations on the product categories that they choose to pursue or the marketplaces they choose to operate on. The company currently has over 1,000 SKUs across 12 brands that sell DTC on Amazon, Walmart, and Shopify. Management noted an 80% success rate on products going from the launch phase to the sustain phase, which they expect to reach within 3 months of the initial launch.

Mohawk plans to ultimately grow its portfolio to include thousands of unique products with profitable and recurring revenue streams that are managed entirely by AIMEE. Mohawk intends to grow through the creation of its own new brands organically and through its accretive M&A strategy targeting smaller 3PS sellers that lack the ability to scale their businesses. Mohawk will continue to target brands that lack the resources to effectively scale beyond a certain point. Once acquired, Mohawk states it is able to integrate new brands with AIMEE as early as 48 hours after completion.

2021 is projected to be the strongest years in Mohawk’s history from a fundamental perspective.

Accelerating Revenue Growth

2021 is projected to be Mohawk’s best year for revenue growth.

Expecting to Reach Profitability in 2021

Mohawk is projecting to breakeven on EPS in 2021.

Improving gross margins

Improving Free Cash Flow and Already Free Cash Flow Positive

Operating Margins Improving, although still not positive

From a fundamental perspective, 2021 will be Mohawk’s strongest as a public company. The acceleration to 87% YoY revenue growth along with EPS profitability are two important factors that could drive the stock price higher this year.

Additionally, Mohawk is already FCF positive and has continued to improve its gross margins over the last several quarters. Operating margin remains negative at -19.5%, but we note that Mohawk has also seen a big improvement in this number in its most recent quarter.

In the midst of the recent tech rout, MWK’s valuation has contracted, and the stock is now trading at 3.3x 2021 revenue. This is an attractive multiple for a company that is projected to grow 87% this year, reach EPS profitability, and is already FCF positive.

MWK stock has exhibited relative strength during the recent tech pullback and is set to announce earnings AH Monday. We are monitoring for an entry as we believe 2021 will be an outstanding year for Mohawk, and there is ample room to grow from the company’s current ~$1B market cap.

Shopify Premium Analysis for 2021

Posted on December 17, 2020June 30, 2026 by io-fund

2536843c-2d08-4b42-8fa9-d362f83f8268_Shopify-Premium-Analysis-for-2021.pdf

Shopify Premium Analysis for 2021

Introduction:

As the market attempts to sort the companies that have temporary covid tailwinds from the more permanent and long-lasting growth, we want to separate Shopify from the pack. You can view our October 2019 analysis here where we discussed the strength of the company’s product-market fit and the catalyst of the Fulfillment Center.

One major update from the last report is that Shopify overtook eBay as the largest online retailer in the United States. When our last report was written, Shopify was the third largest retailer and a sizable portion of our analysis focused on eBay as the one to overtake.

I think we will see Shopify significantly close the gap due to Shopify's global opportunity. Shopify is more localized by allowing the merchant to have a localized domain rather than weaken under one domain as detailed in the October 2019 analysis.

Amazon is customer-centric which sacrifices the merchant-side of the equation. We covered this in 2019 when we stated:

Shopify counts over 800,000 merchants as customers compared to Amazon’s 5 million marketplace sellers. Shopify charges the sellers 2-3% compared to 26.5%. Amazon is also predominantly a United States presence with about 3⁄4 of sales occurring domestically. Shopify does not break out these numbers but it is widely understood to have a global strategy.

As mentioned previously, an important distinction between Shopify and Amazon is that Shopify places the importance on the merchant while Amazon places the importance on the retail customer. While Amazon builds out 1-day shipping, Shopify is building out tools for platforms and tools for merchants.

Amazon’s main value proposition is the convenience, which is why we will likely see Shopify attack this at various angles over the next few years (starting with the Fulfillment Network). Amazon’s e-commerce moat is about the same as Wal-mart’s retail moat; they are behemoths but these behemoths can be disrupted. Amazon took market share from Wal-Mart, and nearly two decades later, we think Shopify is a serious contender to Amazon.

However, it should be noted by not providing the traffic for the merchant, Shopify’s GMV is substantially lower than Amazon’s. We noted this before in the 2019 write-up:

Shopify makes 2.63% of GMV, or $361M of the $13.8 billion. Compare this to Amazon.com who makes 26.7% of GMV ($42.7 billion on $160 billion GMV, in 2018) and eBay who makes 11.7% of GMV ($10.86 billion on $92.6 billion, in 2018).

Percentage of GMV illustrates the power of owning the domain …

How will Shopify catch-up to Amazon? Two specific ways.

1. International Growth: Globally, Shopify has a better chance of penetrating various regions as the merchants (and lack of walled garden) localizes the content and offerings. There is also stigmatism towards Big Tech globally and Shopify works quietly in the background while letting the merchants remain in the spotlight. This will be popular globally — and perhaps even domestically if Shopify can deliver on the Fulfillment Center and close the gap on convenience. Point being, keep an eye on Shopify’s international growth.

The best evidence for this is Shopify’s recent partnership with AliPay. Although this does not meaningfully contribute to revenue right now, it could by next year across the key markets mentioned the press release: The new Alipay payment gateway is available now to Shopify merchants in the U.S., with more markets to come in the future, including Hong Kong, India, South Korea, Indonesia, the Philippines, Malaysia, Thailand, Pakistan, and Bangladesh.

Right now, it’s hard to predict Shopify’s success with AliPay in these regions but it’s easy to see that Shopify is welcomed in geographies where Amazon is not. Therefore, we see global as an important piece to our thesis as merchants who want to reach global audiences will likely choose Shopify over Amazon. We think this is an important competitive edge.

2. The merging of social media and e-commerce as a means for monetization. We’ve belabored the point of Apple’s IDFA changes to first-party vs third-party ads. For social media companies, the answer to weaker data will be to move away from behavioral targeting for ads and move towards direct response and e-commerce. Amazon is weak here as social media companies don’t partner with the behemoth (see below for SHOP’s partnerships). Expect to see additional tailwinds from social media driving more e-commerce traffic.

Market Forces: e-Commerce is eating Retail

There are two market forces driving the success of Shopify right now. The first is the covid pandemic grew ecommerce penetration in the United States from 15% to nearly 35% representing the same level of growth (3X) as the previous ten years combined (5% to 15%). Retailers are now online in an unprecedented number and are able to successfully compete with Amazon.

The more permanent trend will be driven by Millennials and Gen Z with 91% and 89% stating that they shop online, respectively, according to a survey conducted in June. Additionally, data from Morgan Stanley shows Millennials and Gen Z will overtake Baby Boomers as the dominant US spenders in the coming years, meaning the major US consumers of the future will prefer to shop online.

The additional outside force is the remaining addressable market. The statistics above suggest e-commerce will overtake retail while data from Stripe suggests only 5% of global commerce happens online today. This will be compounded by the overall growth in retail.

To summarize, we think the transition towards e-commerce is more permanent long-term than the market is pricing in at this time as retailers have been forced to adopt online stores and younger generations prefer this method.

Below you can see what product-market fit looks like as Shopify takes over eBay in a banner year for e-commerce.

Fundamentals:

In its most recent quarter, Shopify grew revenue 96% YoY to $767.4 million up from $714.3 million in the previous quarter and $390.6 million in the year-ago quarter. GMV grew 109% which was slightly down from the previous quarter of 119% GMV growth.

Merchant solutions revenue increased 132% YoY while subscription solutions advanced 48%. EPS of $1.13 came in 122% above the consensus estimate calling for $0.13 as the company showed its ability to earn sizable profits. Adjusted operating margins of 17% and is up from 3% in the year-ago quarter.

TTM revenue was $2.5 billion, net income of $196.5 million, and adjusted net income of $342.5 million. Here is the company’s growth over the last few quarters:

Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020

GMV $14.8 billion $20.6 billion $17.4 billion $16.3 billion $30.9 billion

GMV Growth (y-o-y) 48% 47% 46% 119% 109 %

Revenue $390.6 million $505.2 million $470 million $714.3 million $767.4 million

Revenue Growth (y-o-y) 45% 47% 47% 97% 96%

Heading into Q4, Shopify is on pace to record over $100B in GMV in 2020. The company has over 1 million merchants in 175 countries with a breakdown of United States of America 52%, United Kingdom 7%, Canada 6%, Australia 6%, and 29% rest of the world.

Monthly recurring revenue as of September 30, 2020 was $74.4 million. The company has cash and marketable securities of $6.12 billion and debt of $750.5 million.

The increase in cash was due to $2.03 billion of net proceeds from Shopify’s offering of Class A subordinate voting shares and convertible notes in the third quarter of 2020 and $1.46 billion of new proceeds from Shopify’s offering of Class A subordinate voting shares in the second quarter of 2020.

An early glimpse into Q4 shows Shopify is likely to have a big quarter as the holiday shopping season unfolds. The company announced record Black Friday sales of $2.4B, up 75% from Black Friday 2019.

Over the past two years, Shopify has doubled its share of Black Friday sales. Most impressive is the acceleration of market share gains the company demonstrated this year.

The median analyst forecast for FY 2020 is $2.85 billion (up 81% YoY) and for FY 2021 is $3.74 billion (up 31% YoY). The median analyst’s EPS estimate for FY 2020 is $3.70 to $3.31.

The harder comps for next year is one reason the stock has cooled off but I suspect that we will see stronger forward guidance as the year goes on.

Here is how Shopify’s forward growth next quarter compares to other popular e-commerce companies:

Fulfillment Center

In June 2019, Shopify introduced the Shopify Fulfillment Network, a fulfillment network that will offer timely deliveries, lower shipping costs, and provide a better customer experience for merchants and customers Last year, the company acquired 6 River Systems to help build out its warehouse automation technology.

The Shopify Fulfillment Network is a 5-year build process for Shopify that remains in the product market fit phase. At this point, Shopify is focused on building out the software but management expects to prioritize the build out into 2021.

COO Harley Finklestein remarked in the company’s Q3 Earnings Call:

“our focus in 2020 around SFN is to achieve product market fit, which we plan to continue up to — into 2021. We want to ensure that the foundation of the fulfillment network is strong and the merchants experience is outstanding before we enter sort of the scale phase.”

Shopify is focused on the long-term opportunity and does not expect to accelerate its SFN investment, as they want to take their time on such a large venture ($1B).

Ultimately, the Shopify Fulfillment Network will utilize machine learning to improve supply chain economics and logistics. The company believes a significant portion of US GMV is addressable by the Shopify Fulfillment Network.

This will help Shopify compete with Amazon as a value add for merchants to make deliveries more streamlined and cost-effective, and will also improve the customer experience for buyers by ensuring faster deliveries.

Other tools and services that Shopify provides includes Shop Pay and Shop Email. Shop Pay allows customers to check out faster the next time they shop by saving the email address and credit card information. More than 60 million buyers opted-in at the end of Q3. Keep an eye on this for an indication of strength under-the-hood.

Shop Email lets subscription plans send emails through Shopify’s system rather than adding another vendor for email.

Notable Partnerships including Social Media

Shopify has several major partnerships that differentiate its platform from competitors. One is Shopify’s sales channel integration with Instagram that allows merchants to sell directly to consumers through product tagging. This allows shoppers to discover and purchase products all within the Instagram app, shortening the path to purchase.

Instagram is a crucial component of a successful ecommerce marketing strategy as it is the 5th most popular app in the US. Shopify’s integration with Instagram allows merchants to market their products and sell those products directly through the app.

Shopify is also partnered with Wal-Mart which was recently announced in June. The deal opens Walmart's Marketplace to Shopify's small business sellers, giving these merchants access to sell their products on the 4th largest ecommerce marketplace in the US.

Early indications show that Walmart Marketplace seller additions have increased 3x from January, demonstrating that Shopify merchants are eager to take advantage of this new opportunity.

A third major partnership Shopify has is with Facebook, recently announced in May. In Facebook’s expansion into ecommerce, they partnered with Shopify to launch Facebook Shops. Facebook Shops is a free tool designed to help merchants create customized online storefronts for Facebook and Instagram. This partnership allows Shopify merchants to control customization and merchandising for their storefronts inside Facebook and Instagram while managing their products, inventory, orders, and fulfillment directly from within Shopify.

Shopify is also partnered with TikTok which was announced in October. Shopify’s new channel integration with TikTok allows sellers to connect their TikTok for Business account and feature in-feed shoppable video ads within Shopify.

Shopify merchants can easily download the TikTok channel app from Shopify’s app store and begin to run and optimize TikTok marketing campaigns straight from the Shopify platform. For now, the TikTok channel is available in the US, but sellers in other North American countries as well as Europe and Southeast Asia will be able to access the service in early 2021.

TikTok was the 2nd most downloaded free app in 2020 with a surging young audience that ecommerce companies covet. Shopify merchants are now able to tap into that global audience.

These partnerships represent a tremendous value-add for merchants and prospective merchants, giving Shopify a big advantage over competitors. At this point, an entrepreneur looking to sell products online is likely to choose Shopify for the reach the company offers, as well as the tools Shopify is frequently releasing (SFN, Shop Pay, Shop Email, etc).

Valuation

SHOP continues to trade at a premium – 32x 2021 revenue, which has remained relatively stagnant over the last five months. In comparison to peers, many of which have seen their valuations continue to climb, Shopify has become more attractive.

In July, SHOP briefly had the highest forward multiple among SaaS stocks. It is now outside the top 10.

Here is the adjusted valuation EV/1-year forward revenue when adjusted for the 3-year growth rate. This helps to put the valuation in better perspective for Shopify.

Below is how Shopify compares on sales efficiency which measures the output of sales and marketing compare to annual recurring revenue. A ratio above 1 indicates a sustainable business model.

Also, here is a comparison looking at consensus projections 2 years out. We feel that Shopify can easily clear these 2-year projections.

Analyst Statements:

SHOP has 14 buy/outperform recommendations, 18 hold recommendations, and 3 underperform/sell recommendations.

Wedbush analyst Ygal Arounian raised the PT of Shopify to $1,300 from $998 in September. “We continue to like the short-term trends and Shopify’s position to capture them, but this call is a longer-term one in addition to those trends, driven by Shopify’s position to capture share of the total retail [addressable market] as it builds out its retail OS,” he wrote.

KeyBanc Capital Markets analyst Josh Beck, who has an overweight rating on the stock, raised the PT from $1,150 to $1,250, said the Shopify Fulfillment Network, which was launched last year, "is a full-fledged, tightly integrated fulfillment solution for Shopify merchants and includes order/inventory management solutions, branding and data controls, and access to scalable, flexible warehousing space to sell across multiple channels."

Morgan Stanley analyst Keith Weiss said “We see SHOP growing the merchant base from 1 million today to 4.6 million by 2030 (Subscription Solutions reaching $4.2 billion), while also expanding the take rate and further powering the Merchant Flywheel (GMV reaches $737B, Merchant Solutions grows to $21 billion),” he said.

12/4 – Cleveland Research Initiated Shopify with a Buy. The analyst expects Subscription Solutions and Merchant

Solutions to experience growth better than consensus expectations in FY22

12/2 – Susquehanna Initiates Shopify at a Hold stating, “The company’s two revenue units of Subscription Solutions and Merchant Solutions have different revenue drivers and can be compared to (mostly) pure-plays in the market. For each business unit, we use a price-to-sales growth valuation given SHOP's high revenue growth levels vs. peers. We value Subscription Solutions at $200 per share and Merchant Solutions at $750 per share."

12/1 – Credit Suisse Rates Shopify Neutral with $1,100 PT, stating “Our $1,100 target price and Neutral rating for SHOP is based on our DCF analysis and implies a 2021 EV/Revenue multiple of 33x. While we remain positive on SHOP given numerous LT drivers, including: the secular shift to eCommerce, Shopify Plus, International, and adoption of additional merchant services (such as Fulfillment) we see risk reward more balanced at these levels.” 11/19 – Jefferies Upgrades to Buy from Hold stating: "We have a greater appreciation for SHOP's ability to deliver robust growth for the next several years and reach ~$10B of revenue in 2025 powered by a structural pull forward in e-commerce activity and better monetization of gross margin value."

10/30 – Argus Rates Shopify Buy with $1,200 PT stating “Although SHOP has run up sharply year-to-date, the company has a strong runway for growth in the small to mid-sized merchant market, which is only lightly penetrated.”

BigCommerce IPO

Posted on August 4, 2020June 30, 2026 by io-fund

BigCommerce priced today on August 4th and is scheduled to trade tomorrow, August 5th. You can view the S-1 Filing here.

Overview

Investors who missed out on Shopify will be eyeing the BigCommerce IPO although there are some important differences to consider. For the most part, the differences are seen in the financials.

Shopify has an annual run rate of $2.8 billion compared to BigCommerce at $151 million based on current quarter’s earnings. This is roughly 20 times more revenue.

Despite Shopify having 20X higher revenue, the company is also growing 3X faster at 97% year-over-year compared to BigCommerce at 31-32% year-over-year through end of June. Before covid-19, Shopify was posting growth between 45-70% compared to BigCommerce in the low 20% range – so again, about 3X more growth for Shopify.

When we look historically at Shopify, the company was growing 95% year-over-year in 2015 when reporting $200 million in revenue. Therefore, no matter how we compare the two companies, whether it’s historically during similar revenue size, pre-covid in 2019, and also post-covid in 2020, Shopify has remained nearly 3X more growth than BigCommerce and is continuing to do so at high revenue run rates.

One way to determine customer demand between competing products is to look at Google Trends. Below we can visualize the popularity of Shopify compared to BigCommerce. It’s interesting to see that BigCommerce search trends have not ticked up much in 2020.

According to the S-1 Filing, BigCommerce will report 30% to 32% revenue growth for the quarter ending June 30th with revenue expected to be between $35.5 million and $35.8 million compared to $27.2 million in the previous year. Net losses will slightly improve from $11 million same-quarter last year to between $9.4 and $9.0 million this year.

The company had a gross margin of 76.1% in 2018, 75.9% in 2019, and 76.8% and 77.5% for the three months ended March 31, 2019 and 2020, respectively. The company had a net losses of $38.9 million in 2018, $42.6 million in 2019, and $10.5 million and $4.0 million in the three months ended March 31, 2019 and 2020, respectively.

The company is reporting ARR to be roughly $151 million, which is higher than the $144 million ARR if calculated off the current quarter. This will represent an increase of 31.5% at the mid-way point, up from $115 million ARR from June 30th last year.

BigCommerce saw Essentials plans increase 33% in March, 106% in April and 86% in May. The enterprise plans increased only 14% and 13% in March and April before showing a marked improvement of 60% in May. Interesting enough, BigCommerce did not match Shopify’s offer of extending a free trial from two weeks to three months to incentivize covid conversions.

According to the filing, BigCommerce ranks second to Shopify from third-party reviews: “As of June 1, 2020, BuiltWith.com (“BuiltWith”) ranked us the world’s second most-used SaaS ecommerce platform and top five overall among the top one million sites globally by traffic, which we believe consists primarily of established SMBs.

We also were ranked the second most-used SaaS ecommerce platform among the top 100,000 sites globally by traffic, which we believe consists primarily of mid-market and large enterprise businesses.”

Ecommerce Market

There were quite a few statistics provided by BigCommerce in the S-1 filing that support growth of e-commerce, such as: “In June 2020, eMarketer predicted that U.S. brick and mortar retail spending will decline by 14% in 2020, whereas U.S. consumer ecommerce spending will increase by 18%, the highest growth rate since their coverage began in 2008.”

According to McKinsey & Company, 10 years of growth has occurred in e-commerce in the last three months with the microtrend showing hockey stick growth in Q1 2020. Evidence of this was seen in Shopify’s most recent earnings report yet BigCommerce has only accelerated from mid-20% growth to mid-30% growth.

One notable positive for BigCommerce is that Tiger Global plans to buy up to 20% of the shares. This is one reason Fastly has done well; Abdiel Capital owned a significant amount of shares relative to float helping to prop the stock price. Tiger Global Management’s interest was disclosed at the beginning of the S-1 filing.

Company Background:

The company was founded by Eddie Machalaani and Mitch Harper in 2009. It was spun off from their email marketing Software Company called Interspire which was started in 2003 by a chance meeting in an online chatroom. It also relocated the company from Sydney to Texas in 2009.

The company announced a $15 million Series A funding led by General Catalyst in August 2011. It acquired Zing, a provider of mobile retail technologies in April 2015. Later that year, the company leadership transitioned from the original founders to the current CEO and management team. In May 2018 it raised $64 million Series F investment round led by Goldman Sachs. It also opened the London office in the same year.

Growth Opportunities:

BigCommerce is focused on international expansion. The company pointed out in the S1 filing that 25% of their stores are located outside of the United States compared to 58% of ecommerce sites located outside the United States. In July of 2018, BigCommerce launched their first European team in London, and in 2019, their first Asian office in Singapore. Revenue grew 20% in EMEA and 28% in APAC in 2019.

According to BuiltWith as of January 2020, 42% of all ecommerce websites are based in the United States, and 58% are outside of the U.S. IDC estimates that the Americas, Europe, Middle East and Africa (EMEA), and the Asia Pacific region (APAC) will represent 61%, 22%, and 17% of total global spend on ecommerce platform technology in 2020, respectively, with EMEA and APAC growing at CAGR’s of 8% and 17% through 2024, respectively.

In the Alibaba PDF, we covered the importance of the B2B ecommerce trend (as opposed to the B2C trend). Last year, 10% of BigCommerce’s customers came from B2B sales. In addition, Forrester rated BigCommerce as a “strong performer” for B2B Commerce Suites in Q2 2020. The management has noted this is an area of focus for them. This is an important area to watch as Shopify and other B2C competitors are not listed here.

Facebook Shops launched in May of 2020 as a headless commerce option where various backend services are presented to social media users. For instance, a consumer may be finishing a purchase with Shopify, BigCommerce, Woocommerce, or a few others and the product description will look the same. This eliminates the need for a website in order to sell products. BigCommerce already had previous Facebook integrations. Facebook’s long game is to integrate the cyptocurrency Libra.

Note on Valuation:

BigCommerce has increased its shares from 6.85 million to 9.02 million. The estimated price range is $21 to $23 as of 12 pm ET on August 4th. This puts the market value at $1.7 billion, fully diluted. If we take the ARR the company has represented at $151 million, then the price to sales is 11.2. At the actual ARR of $144 million, the price-to-sales is 11.8. As pointed out by Nasdaq.com, BigCommerce calculates ARR differently than Shopify.

There are very few SaaS companies trading at a forward 11-12 price-to-sales. Shopify is trading at a forward PS ratio of 48. This is why you should expect the opening price to be much higher for retail investors.

Pictured above: Fast-growing SaaS companies can attract a forward price-to-sales around 30 with forward growth of 40%. BigCommerce has forward growth of 32%.

I think it’s important to point out that most IPOs settle below or at their opening price within the first year (assuming BigCommerce opens at a 30-40 price-to-sales).

When Zoom Video went public, they had an immaculate S-1 filing with sizable growth and had a clear and straight path to profitability. We saw this company come down and trade at its opening IPO price within the first year. Pinterest traded below its IPO price many times. Slack has not fully recovered its opening IPO price. Roku began to shoot up very nicely with earnings beats and so this was an exception where the company’s IPO opening was a good deal and buying in the first quarter of its trading history created gains.

BigCommerce has chosen this time to go public for a reason as ecommerce has serious momentum. It’s impossible to predict where the stock will open for retail investors.

BigCommerce will hope to ride Shopify’s coattails. It’s important to consider that we’ve been given a glimpse of how covid has re-accelerated revenue and BigCommerce is posting 32% growth compared to Shopify’s most recent quarter of 97% growth.

The listing’s price-to-sales is very reasonable of 11-12 but once we are in the 30-40 price-to-sales for the opening price, we are confronted with risks as BigCommerce will need to maintain the growth of other popular SaaS products that had competitive growth pre-covid. The question truly becomes “what company do I want at the 30-40 price-to-sales and what companies are worth the risk at the 50 more more price-to-sales?”

IPO frenzies can cause investors to forego rational thinking. I can’t imagine paying a Shopify valuation for a company with 1/3 the growth and 1/20 the revenue. However, there’s a possibility we see it near this valuation tomorrow due to ecommerce being a hot trend. If Bigcommerce shoots up to this level, I will be respectfully on the sidelines. Not because I’m not willing to pay high valuations but because I require above average growth for high valuations.

Conclusion:

BigCommerce is centered in a massive trend yet is not showing as much revenue growth as its competitor, Shopify. Although BigCommerce will certainly open higher than the list price which is at a 12 price-to-sales; how high and if the company is a good value becomes questionable at around the 30 price-to-sales range and even more questionable at the 40 price-to-sales range as the excitement of the IPO would place BigCommerce up against companies that have reported excellent growth for quite a while (rather than one quarter).

We could see BigCommerce accelerate revenue beyond the 32% mark that is being reported after the first full quarter of covid. That’s the gamble – is this quarter and perhaps next quarter an outlier or are they indicative of a more permanent trend and revenue growth trajectory. This is a bigger gamble than Shopify, Zoom Video, and others that had strong growth prior to covid.

The narrowing losses are a major plus. Also, Tiger Global is looking to invest up to 20% because the likelihood of BigCommerce being an acquisition target is high (in my opinion, this is one reason why Tiger Global would take a large stake). It’s easy to think of a few companies that would acquire a $2-$3 billion competitor to Shopify: Amazon, Wal-mart, Facebook, for example. BigCommerce has 60,000 online stores in 120 countries and the fulfillment centers that Amazon and Wal-mart have would be a good match for BigCommerce’s features. Customers include Avery Dennison, Ben & Jerry’s, Burrow, SC Johnson, SkullCandy, Sony, and Woolrich.

We will try to enter up to 30 price-to-sales but may need to back off beyond this and feel that 40 price-to-sales is the cutoff for our portfolio. If the stock trades between 30 to 40, it’ll be up to Knox’s discretion and he will post this in the Buys chat room on the forum.

Ecommerce is hot right now and the market has shown some irrational behavior in other hot trends. We are okay trying to capitalize on hot trends but we prefer to have more consistent growth than one outlier quarter as part of our thesis. We also think the growth should be higher than 32% given the effects of the pandemic. In this case, it’s not worth the 48 price-to-sales ratio that Shopify is trading at but we will see what the (sometimes irrational) market decides tomorrow.

Alibaba’s IPO

Posted on November 13, 2019June 30, 2026 by io-fund

Alibaba’s application to list on the Hong Kong Stock Exchange has been approved and will be an offering of up to $15 billion worth of shares, which will be the 3rd largest listing on the exchange. Alibaba will begin a roadshow soon. The new shares will then go live November 25th.

This listing will allow Chinese investors to buy shares of Alibaba, a beloved company, for the first time. This coupled with China’s recent propensity to buy new tech listings, should be a positive for the stock.

Keep in mind, Hong Kong is going through a period of political unrest. We can see from BABA’s trading action that investors are unsure of how the IPO will affect the stock price in the United States. One scenario is there is an arbitrage situation, where the higher price on the Hong Kong exchange increases the attractiveness for our market.

We published a PDF on Alibaba in October and this PDF is still very relevant. We encourage you to read this if you are interested in this company.

Technical Analysis

By Knox Ridley

Big Picture – Alibaba’s daily chart since IPO

The above chart is the daily price action of BABA going back to its IPO in 2015. Since bottoming in in late 2015, Baba has been in a strong uptrend, which is highlighted by the blue dashed line moving up. When looking at the health of an uptrend, the RSI can tell you if it’s healthy, or fading. The green arrows indicate a healthy uptrend.

Notice the RSI oscillated above the 70 line and rebounds at the 50 line. This coupled with upward price, suggests more gains are potentially ahead.

Now, notice the RSI in late 2017. The red arrow is indicating that the RSI begins to trend down while the price keeps going up. This is the indication of an unhealthy uptrend.

Since bottoming in December 2018, Baba has recovered to an extent. Notice how the price is being squeezed by the triangle pattern, which is highlighted by the 2 blue dashed lines.

The RSI, though making higher lows, which is a great sign for building momentum, still has not breached the 70 line, which is a warning to bulls. I will want to see the RSI break through this level while price breaks through the upward triangle channel before I can confidently go in for the next leg up, while also raising my stops to protect any gains. Adversely, if the RSI breaks the upward trend, which is highlighted by the green arrow going up just below the RSI, that will be an indication the trend is breaking to the downside.

The Bull Case varies based on the state of the larger degree Wave 2 in green. It basically has us ending the Wave 2 drawdown in December 2018. That would put us already within the Wave 3 uptrend, which I have us topping out around $250 region, simply based on where we generally see 3rd Waves topping out.

The only problem that I have with this count is that the it took around 3 years for the first wave to form, and only 3 months for the second wave. This isn’t normal, but I’ve seen stranger things when analyzing the structure of a trend. So, if Baba decides to break resistance with the RSI in tow, I will happily go long with a stop just under $160.

For a buy and hold, Baba below $160 is a good target for any long only investor. Some of the Fibonacci counts have us with a retrace to at least $130.

Volume Report

The above chart is a snap shot of the daily price action of Baba going back to the beginning of the most recent bear market in China, coupled with the daily volume below the price.

Fundamentally, price is simply a battle between buyers and seller. If you think of it as a scale, if the weight of buyers increases, the price will increase, and vice versa. So, when institutions – i.e., the “smart money” – make a position, it will do so in large volume, which will move the price of the stock.

I look for two things: (1) larger than normal volume spikes, that do not coincide with earnings reports; (2) Large spikes in volume that coincide with large moves in price.

That being said, the blue lines above indicate prices at which we see institutions deciding to sell. The above chart shows four instances of heavy selling with significant price moves within this range.

Notice how difficult it has been for Baba to break out of this range to the upside and hold. I’d like to see the volume spikes shift to the green around this price level before getting more confident in the upward direction of Baba.

Conclusion:

We are long on Alibaba, and believe it is undervalued based on current prices. Our cost basis is currently below $160, so we are holding it without stops. If it breaks the $160 price zone, we will likely add more to our position for the long haul.

If you are more cautious and do not yet have a position in Baba, I’d place a stop just under $157 to protect from a larger degree drawdown. And, if you’d like to wait for more confirmation, you can wait for Baba to confirm both in RSI and in price through the triangle pattern with a much tighter stop.

Alibaba Premium Analysis 2019

Posted on October 11, 2019June 30, 2026 by io-fund

fe5dd2d0-c208-4bd7-8d85-d9b1caa0d308_Alibaba-Premium-Analysis_2019.pdf

Alibaba Premium Analysis 2019

Introduction:

Alibaba is situated between two of the major growth drivers in tech: cloud infrastructure and B2B eCommerce. China is the world’s leader in manufacturing, and this country has the widest gap between the current cloud IaaS and future cloud IaaS market.

Alibaba would be a breakaway stock if not for the trade war and China’s slowing economy. The second-largest economy in the world grew 6.2% in the second quarter of 2019, a drop from 6.4% in the first quarter. This is the slowest growth since 1992. Industrial output growth slowed to 4.8% in July, which is the weakest pace since February 2002.

This analysis will outline the major industry verticals that Alibaba is uniquely positioned to benefit from along with technical analysis to help guide entry in a choppy geo-political environment.

SECTION 1: Fundamentals

Alibaba trades at 25x forward earnings and 21x cash flow, while growing revenue at 40% with long-term earnings growth projected at 26% and a PEG of 1.1. Amazon trades at a forward PE of 45 and MercadoLibre at 111.

Alibaba’s projected earnings growth is higher than its mega-cap peers at 26%, including Facebook at 21.6%, Apple at 4.53%, Amazon at 18.9%, Microsoft at 11.1%, or Alphabet at 17.6%, placing its implied share price at a minimum of $231 when comparing P/S ratios to forward growth. Based on P/E ratios to forward growth, Alibaba is also undervalued relative to its peers.

According to MarketBeat, analysts have a consensus price target of $221.64, representing 33% price target upside. Analysts have had a BABA price target above $200 since early 2018. Since the last earnings report, HSBC, Morgan Stanley, Raymond James, Goldman Sachs, Bank of America and a few others have either set price targets above $200 or boosted their price target.

• Revenue last quarter rose 42% year-over-year to $16.8 billion compared to 51% growth YoY in the last quarter

• Operating income grew 27% year-over-year excluding stock-based compensation from Ant Financial. Adjusted EBITDA increased 35% year-over-year to $5.7 billion

• Net income was $2.79 billion with non-GAAP net income of $4.05 billion, with an increase of 54% yearover-year

• Diluted earnings were $1.17 and non-GAAP of $1.83, or an increase of 56% YoY.

Core commerce revenue was up 44% and “other revenue” was up 134%, consisting of new retail and direct sales businesses. The company reported strong growth in Southeast Asia, with orders growing over 100% for the third consecutive quarter. Cloud computing was up 66%.

The most recent earnings report called attention to the fast-growing Taobao, the world’s biggest eCommerce site, and Tmall, a spinoff of Taobao. These platforms grew 44% and 34%, respectively. Taobao has 730 million active buyers across its marketplaces, representing about 50% of the Chinese population.

The last earnings report also highlighted additional revenue drivers such as the grocery retail chain Freshippo, and the Cainiao Network, which offers cross-border fulfillment and last-mile solutions. As of June 30th, 2019, there were over 150 self-operated Freshippo stores.

Alibaba may hold a separate listing in Hong Kong for as much as $20 billion this year.

SECTION 2: B2B eCommerce

The B2B eCommerce opportunity is tremendous with estimates the market will reach $12.2 trillion in 2019 compared to $2 trillion for the B2C market. Of this, Asia Pacific contributes 80% to the market with North America and Europe’s share being 12% and 3%, respectively. The four largest markets are China, Japan, South Korea and the United States.

According to Gartner, spending on B2B eCommerce platforms is expected to grow at a CAGR of over 15% during 2015-2020. The Asia Pacific B2B eCommerce market will be worth an estimated $9.8 trillion in 2019, up from $4.7 trillion in 2013. Compare this to the North American market, valued at $1.4 trillion in 2019.

According to Accenture, 50% of B2B companies around the world began to implement a digital strategy in the last three years, rather than rely on a salesperson’s personal relationship with the client. B2B eCommerce follows either a direct model that allows companies to sell directly to buyers, or a marketplace model where products are sold alongside competitors. The marketplace model has gained the most traction due to the ability for wholesalers, distributors, and manufacturers to test new geographic markets.

Alibaba claims 30% of the Chinese B2B market and is expanding its operational base into India, Europe and the United States. Due to a vast network of low-cost suppliers, Alibaba is able to dominate the market. Alibaba’s main strategies include adopting an online to offline (O2O) approach and collaborating with local finance and logistics companies in international markets.

China is the largest B2B eCommerce market in the world and is expected to grow from $1.3 trillion in 2013 to an estimated $3.5 trillion in 2019, at a CAGR of 17%. China’s market is bigger than both North America and Europe combined.

In 2018, the top three B2B platforms in terms of revenue were: Alibaba, HC350 and Cogobuy. Together, these three companies make up 57% of the Chinese market. Alibaba is now focused on the Indian market, where the company competes with Amazon.

SECTION 3: Ant Financial

Ant Financial is the Alibaba affiliate that operates the Alipay payment service. Operating income tripled in the most recent earnings report. Alibaba’s share was $237 million, representing 7% of operating income, which was the highest in two years. In the past, Ant Financial has run at a loss or provided zero earnings.

Ant Financial is worth about $150 billion and serves about 1.2 billion users with 300 million users outside of China. The company is considered one of the most valuable private sector FinTech companies in the world. Due to a recent restructuring deal, Ant Financial is eligible for an IPO in the coming years.

SECTION 4: China’s Cloud IaaS Market

China has been more than fashionably late to cloud infrastructure with a total market size of $1.2 billion in 2018 compared to the United States’ $40 billion in 2018, which affords a window of opportunity. The majority of the 20x growth of this segment in China will funnel into Alibaba with the company already owning 90% of the market.

China’s enterprise IT market is five to seven years behind the United States and Western European markets. Once fully mature, China’s need for cloud infrastructure will rival the United States with 3x the population and a bottomless appetite for smart cities, artificial intelligence and machine learning plus manufacturing IoT automation.

The reversal of where China is today with cloud IaaS, and where China will be in five years, could be a bigger story than the B2B marketplace as the growth is closely tied to China’s position as a global leader.

In 2017, China published a roadmap on how it seeks to become a global powerhouse in AI. According to the report entitled “Next Generation Artificial Intelligence Development Plan,” the domestic AI market will be worth a total of $150 billion. Today, China’s AI market is worth $6.2 billion.

Artificial intelligence and machine learning require private cloud and public cloud infrastructure-as-a-service (or a hybrid mix with on-premise servers) as storing data in separate silos weakens AI and ML capabilities, reduces training performance and lowers accuracy. Artificial intelligence and machine learning require speed with most AI solutions split between 40/60 with private/public cloud or 60/40 if you’re a regulated industry. The United States CIA describes moving to the cloud in 2013 the “best decision we’ve ever made” as what used to take 180 days to provision a server improved to 60 days, and now takes minutes.

At roughly fifty percent year-over-year growth, China’s AI market will reach approximately $60 billion by 20232024, which is in line with China’s Development Plan. This is also in line with the global market forecast which puts the AI market at $190 billion by 2025. The overall Chinese AI industry is growing at a rate of 67 percent and the country is now producing more AI patents than the United States. On that note, Alibaba’s cloud growth is currently at 66% year-over-year with $1.13 billion in quarterly revenue.

4B. Alibaba Cloud

Amazon is the perfect example of how profits from a cloud economy can outpace eCommerce income. The parallels between Alibaba and Amazon are easy to see. Both are e-commerce companies that are pioneers in cloud infrastructure as a vast number of servers had to be built to handle traffic spikes and large work-loads on peak days, such as Black Friday and Singles Day.

In the most recent quarter, AWS accounted for 13% of Amazon’s overall revenue and 52% of Amazon’s $3.1 billion operating income and is growing at 37% year-over-year. Microsoft’s cloud IaaS is growing at 64% YoY.

As stated previously, China has been late to adopt IaaS cloud, and this likely contributed to Alibaba’s delay as the first serious investment by the company was made in 2015, six years after the launch in 2009. Since 2015, it has taken Alibaba only three years to reach a $1 billion run rate compared to Amazon’s six years (2006-2012).

In addition, tech developers are responding to Alibaba with over 120,000 people attending its cloud conference compared to the AWS conference, which attracts 50,000 attendees. This is important intel that financial statements don’t reveal.

Alibaba Cloud reported 66% year-over-year growth in Q2 2019, primarily driven by enterprise customers. During the June 2019 quarter, Alibaba Cloud announced the SaaS accelerator plus over 300 new products and features. This is what the current YoY cloud growth trajectory looks like when modeled.

The law of large numbers could slow the trajectory depicted on the chart, although China’s late entry to the cloud IaaS market is likely to do the opposite and accelerate (or at least sustain) the YoY growth in the nearterm.

Today, AWS reports about 40% growth YoY more than a decade after it launched. Microsoft’s Azure reported 300% growth between 2015-2016 and 90-100% growth for the following years.

Globally, Alibaba has quietly become the number four cloud services provider worldwide, behind Amazon, Microsoft and Google when Synergy Research Group placed Alibaba ahead of IBM. Note, Gartner places Alibaba as the number public cloud provider. Across Asia-Pacific, Alibaba is the number two cloud services provider.

Alibaba Cloud was launched in 2009, however, the company did not take the IaaS revenue segment seriously until 2015, when Alibaba made its first investment of $1 billion. As stated in previous analysis, China has been late to adopt IaaS cloud, and this likely contributed to Alibaba’s delay. When adjusting Alibaba Cloud to 2015, we see it took 3 years to reach $1 billion run-rate (2015-2018) while it took Amazon 6 years to reach a $1 billion run-rate on AWS (2006-2012).

4C. Capex for Cloud IaaS

For the most recent quarter, adjusted EBITDA margin for Alibaba Cloud was -5% compared to -10% and -4% in previous quarters. According to the company, infrastructure and capacity investments triggered the quarterly loss.

Alibaba’s quarterly free cash flow in Q2 2019 was $3.8 billion with net cash of $5 billion. Therefore, like Amazon, the e-commerce business is able to carry the capex requirements for the cloud business. With that said, investors should be aware that building modern cloud computing services requires billions every quarter. For historical. comparison, Google spent $5.6 billion in accrued capex in Q3 of 2018 and Microsoft spent $4.3 billion on capex during the same period for “ongoing investment to meet demand for our cloud services,” as pointed out by Amy Hood, Microsoft’s CFO.

Please keep in mind, there will be opportunities for an attractive entry as Alibaba Cloud will not command AWSlevel and Azure-level percentages of revenue until H1 2020/H2 2020 and onward.

However, once AWS and Azure reached $5 billion in revenue, stock prices were around $300 and $70, respectively so entering Alibaba before the Cloud revenue reaches $2-$4 billion in quarterly revenue is important. While IaaS did not account for all of the increase in revenue (obviously) from the $300 and $70 stock price mark for AMZN and MSFT, I want to emphasize that cloud IaaS is Amazon’s top growth driver still today and Microsoft’s fastest growth driver for many years is Cloud IaaS.

The capex costs will affect free cash flow at times, however, this is not a concern long-term as typical cloud profit margins are around 58 percent and typical operating margins are at 22 to 32 percent.

Time Machine: Time Machine:

I wanted to leave you with a fun, little blurb from Amazon’s earnings in 2011 on AWS when it was at $1 billion in revenue (it’s now at $25 billion in annual revenue in 2018). Alibaba Cloud is at the $1 billion barrier right now.

“The speculation that Amazon's cloud is breaking the $1 billion barrier in the very near future comes as the cloud giant prepares to announce its 2011 second quarter earnings Tuesday.

"While still very small for Amazon (likely about $750 million revenue run rate), given the size of the market opportunity and Amazon's strong competitive positioning, we believe that this could soon be a $1 billion revenue segment," Citigroup Internet analyst Mark Mahaney said in a note to investors last week.

And Mahaney isn't alone in his lofty Amazon cloud expectations. In fact, his estimate could be seen as conservative. JPMorgan Chase's Dough Anmuth told Reuters that he expects Amazon's AWS to generate a whopping $2.6 in revenue come 2015.”

SECTION 5: TECHNICAL ANALYSIS

By Knox Ridley

5A. Overview – Weekly Chart

Looking at the weekly price action, along with the weekly Relative Strength Index (RSI), provides us a with a view of the overall health of a trend. Providing this history helps to also filter out any short term moves that are based on emotions. The above chart is Alibaba’s (BABA) weekly chart going back to 2016.

Long-Term Trend Lines

The dark blue trend lines highlight the long-term trends in play. The uptrend line started with the 2016 bull market. The price has tested this trendline 4 times on the weekly chart, going back approximately three years. It’s worth noting, the more a stock tests a support/resistance region, the weaker it becomes.

There is also a downtrend line, highlighted in blue that has been pushing the price of BABA down since the June high in 2018. These 2 trend lines are converging into a triangle pattern. The price of BABA is being forced to a decision soon, and we will know rather soon if the bottom is in for BABA, and the uptrend will continue, or if we could get a retest of the December lows.

5B. Moving Averages

The 50-Day Moving Average is in orange. The price of BABA is trading just below the 50-day. This average is acting as resistance, and is sandwiched between the 50-day, above, and the blue long-term trend line below. The pressure is currently down, but what BABA does in the next few days will determine the next move in the trend.

The 200-Day Moving Average is in green. The 200-day is commonly looked at as the final stand for a bull pattern. It’s worth noting that the 200-day is currently just below the $130 region, which coincides with the December 2018 bottom and 39.2% retrace level. Any pull back from here, and the 200-day will be major support to follow.

5C. Intermediate Trend Lines and RSI Warnings

The two dotted lines are lower time frame trendlines. Note how the price trends coincide with the RSI trendlines below. This is always a sign of a healthy trend. When I see a trend like this – both down and up – I follow the RSI to get a clue as to when the trend may be over.

The red X indicates the point where the price and RSI both broke their trends. As usual, this happens in unison, and is a major warning for anyone long the position. Leading up to this trend break, the RSI started making lower highs, warning of a momentum slow down. These valuable tools that Technical Analysis can offer help to manage risk.

Conversely, we have the opposite scenario on the downside. The price and RSI followed a downtrend into the December low 2018, which is shown by the second dotted line. Just after this moment, both the RSI and the price broke their downtrends. The RSI made higher highs as the price made its final low. All of these signs indicate a reverse of trend to the upside.

I’m pointing this out because we have a similar pattern unfolding today. The RSI and the price are hovering just above their respective trendlines. If they both break, I would take that as a warning of further down side to prepare for.

In conclusion, because we are trading at the end of a triangle pattern, BABA is about to give us an indication as to the direction of the next move. Below, I outlined the bear and the bull cases.

5D. Elliot Wave – Bear Count

The bear count has us currently in a larger degree Wave 4, which are the numbers #1-#3 highlighted with the blue count. The extensions of this count are in blue on the far right. These extensions act as guides for moves higher and lower and they are important for determining the likely target of any additional pullback.

If we look one degree lower, you’ll see the red 5 count, which is the internal waves of the blue count.

Remember, the pattern of 5 waves in the primary direction and 3 waves in a corrective direction is occurring on

All levels – larger degree and smaller degree. So, the larger degree Blue count, has its own internal count, which can give us clues as to where the market may be leaning.

So, we have a clear 5 waves up in red, which completes wave 3 in the blue count. The retrace levels of this count, are shown in red on the right. We touched the 38.2% retrace level, which acted as final support for the previous pullback.

I put the 50% retrace level on the chart as well, which is the bottom of the bearish target box in green. I don’t see BABA going lower than this level, even in a worst-case scenario. Furthermore, I believe you have to have a “good enough” price tag for a solid long-term investment in a downtrend. Baba at or below $130 is a steal, even if it goes lower.

A pattern that keeps showing up within this pullback is a classic A,B,C correction, where the C wave extends with 5 waves to at least the 138.2% extension. This can be seen with the first drawdown move with the orange A,B,C count, and with the 5 wave count of the final C wave revealed in teal roman numerals. This pattern is a clue to

the likely path of the larger degree pattern, and I am expecting this pattern to unfold to the downside in my primary count. The extension to this final C wave down is shown in pink.

If we break the $146 support region, I will consider this count in play, and suggest preparing accordingly. I will consider this count to be invalidated if we break the triangle pattern to the upside and close above $185. At this point, we will likely be in the bull count, which is listed in the next section.

5E. Elliot Wave – Bull Count

The Bull Count has the larger degree wave 4 ending at the December low. We have all the waves and the proper structure in place to justify this; also, the time frame works to justify this count as well. If this count is where we are, then we are in the final 5th Wave push, and just about to begin the heart of this move, which I calculate will take us well beyond the all-time highs. This count will be invalidated if we move beyond the $146 support region. If this happens, we will likely revisit the $130 support region and possibly beyond.

Because of the fundamental story in BABA, we have a high conviction on the company, yet naturally, are unsure of the geo-political environment. For now, we favor the bull case absent any news around the trade war, the delisting of Chinese companies, etcetera. At minimum, I’d place a stop just below $146. If you want further confirmation, wait for $185.