Monday, Nov 23rd 2020

We've invested you in Shopify

Investor Update

At Titan, we rigorously monitor investment opportunities for you on a daily basis. We just found one that meets our bar: Shopify (SHOP). We've invested roughly 5% of your Flagship assets into the stock.

Shopify is the "operating system" of modern retail and what many say is the anti-Amazon. If Amazon is the behemoth "Everything Store," Shopify is arming the rebels: millions of small businesses use Shopify to run online stores.

Because it is well-positioned to capitalize on the step-function increase in eCommerce penetration resulting from COVID-19, we believe Shopify can reach $1,500 per share in the next three years (18% annualized return).

We've sold your shares in (CRM) and invested the proceeds into SHOP for you. We're pleased with the outcome in CRM (34% annualized return since our purchase in 2018), but the stock's valuation has expanded by ~70% this year and we believe SHOP now presents a better risk/reward.

Linked above is a 3-minute video from myself and our Director of Research explaining the SHOP thesis, along with the full Initiation Report (5-minute read). Key highlights below.

Highlights from our Shopify Investment Thesis##

We believe Shopify is the “operating system” of modern retail, and is positioned to capitalize tremendously on the recent step function increase in e-commerce penetration globally.

  • E-commerce penetration has jumped 10 years forward in 90 days’ time as a result of the COVID-19 pandemic. We think e-commerce industry sales can grow 20%+ per year, and Shopify’s gross merchandise value (GMV) can compound at 30%+ per year.
  • Shopify’s revenue can grow 35-40%+ per year for the next 3-5+ years with growing adoption of new merchant solutions like Shopify Fulfillment Network, Shopify Balance business accounts, and Shop Pay Installments.
  • Expanding partnerships and international investments are additional revenue opportunities.
  • Strong unit economics and increasing scale should support 30%+ operating margins over time.
  • The biggest risk with owning SHOP today is admittedly valuation, but we believe SHOP is well-positioned to continue beating and raising sales estimates, growing into its valuation over time.

In summary, we believe SHOP could be the next Amazon or Netflix: a rapidly-growing, founder-led company in a massive and growing market, but which is perennially undervalued by investors due to concerns about near-term valuation; concerns which underestimate the longevity of SHOP’s top-line growth algorithm and the pull-forward impact of COVID-19 on e-commerce penetration more broadly.

Exited Position: CRM##

Original thesis: " is the undisputed leader in cloud-based CRM software, with 20% market share in a massive and growing market. The AI-based CRM market should expand to over $1 trillion by 2021, and the company will take share in that market. The company has strong recurring free cash flow from its sticky, high-margin subscription revenue model... should see margins and cash flow improve."

What changed: Valuation expanded materially such that we now see a better risk/reward in Shopify. The business remains incredibly strong, but CRM’s valuation has expanded to the most expensive level in decades and is one we’re not as excited to pay, especially with small/mid cap software valuations having risen materially (adding incremental risk to CRM’s acquisition-driven growth algorithm).

Our action: We exited our position in mid-November up +124% (+34% annualized return) since we initiated the investment for Titan clients in February 2018. We’re very pleased with this outcome and would consider re-initiating the position if the risk/reward becomes very attractive again in the future.

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