Weekly Brief #26
Shopify’s massive drop in value, Disney's partnership with Warner, Russia's Western asset seizure, Nestlé's $197 million investment in Brazil, FTX's reimbursement for all its customers, and more.
Good morning investors 👋,
Happy Friday and welcome or welcome back to the 26th Weekly Brief.
A ton of great stories this week: Shopify loses over $21 billion in value, Disney partners with Warner Bros., Russia seizes nearly $13 million from JPMorgan and Commerzbank, Nestlé invests $197 million into Brazil, Shohei Ohtani’s interpreter pleads guilty for bank fraud (bonus), and FTX’s announcement to reimburse of all its customers.
Let’s get into it.
In this issue:
📉 Shopify’s massive drop, explained
🤝 FTX to fully reimburse all its customers
🇷🇺 Russia seizes Western banks’ assets
FEATURED STORY
📉 Shopify’s massive drop, explained
Shopify, once Canada’s largest company, dropped over 20% after releasing its first-quarter earnings this week, the most ever in the company’s history.
For a little background, Shopify is an e-commerce company and platform that allows businesses to create and manage online stores, simplifying the process of selling products and services. They also offer point-of-sale (POS) readers and add-ons that connect to these stores (similar to Square) for businesses selling in person. They charge a monthly fee for the software for the stores and make a percentage off every transaction using their POS readers. This is their main business.
Straight from the earnings report (near verbatim), here are some of the most important stats:
Revenue increased 23% to $1.9 billion compared to the prior year, which translates into year-over-year growth of 29% after adjusting for the sale of our logistics businesses.
Gross merchandise volume (the total monetary amount a company transacted during a period) increased 23% to $60.9 billion, an increase of $11.3 billion year over year.
Free cash flow was $232 million compared to free cash flow of $86 million in the prior year.
Looking at these statistics, it seems the business is growing, and that’s great. But then things start to get fuzzy.
Net income (loss) amounted to ($281 million), compared to a net income of $77 million in the previous year.
Outlook for the second quarter of 2024:
Revenue to grow at a high-teens percentage rate on a year-over-year basis.
Shopify lost money this quarter, and to add, the market expected growth outlook in the high 20s instead of high teens (18-19%)—there’s the answer for the 20% sell-off. Factoring in the sale of their logistics business, and the growth outlook is technically over 20%, but the market isn’t usually a fan of math.
However, is this sell-off justified? Here’s my perspective as a shareholder1:
No, the sell-off is not justifed.
It wasn’t the best quarter, but it wasn’t the worst, and this sell-off is likely an overreaction. With a FWD P/E of 70 and a forecasted growth rate of nearly 50%2 annually for the next few years, this drop in Shopify could even be a buying opportunity. Earnings were beat on the top and missed on the bottom line, yet every other fundamental continues to grow.
The main reason for the sell-off (as listed above) is because guidance for 2024 was 18-19% instead of the expected 20% or more, and obviously, because of the net loss. By the end of this year, I believe Shopify’s free cash flow will have doubled or at least risen 50%, and net income will grow as Shopify continues to gain profitability. All of this is why I bought more.
Unlike what we saw last week with Starbucks, where practically every single metric was down 10% or more, Shopify is continuing to grow its fundamentals. In fact, here are some other aspects of the company investors may not know of:
Shop Pay starting to rival PayPal. With Shopify Payments’ $36.20 billion3 in transaction volume this quarter, or $145 billion annually4, it could eventually turn to be a rival to PayPal in the future.
Shopify issues loans better than a bank. Once a business on Shopify reaches over a million dollars in revenue consistently, Shopify will contact the owner asking if they need a loan. Since Shopify knows how much the business is making, they can underwrite the risk better than a bank. The loan is then paid off via a percentage of revenue automatically from the business owner.
FINANCE
a. 🚔 Ohtani’s interpreter guilty for bank fraud
Ippei Mizuhara, the former interpreter and manager of Japanese baseball star and highest paid athlete ever, Shohei Ohtani, has agreed to plead guilty to federal charges of fraudulently wiring nearly $17 million from Ohtani's bank account to pay off his gambling debts. Mizuhara allegedly impersonated Ohtani over the phone to authorize the transfers, and did so without Ohtani’s knowledge.
Mizuhara faces a maximum of 30 years in prison for bank fraud, up to 3 years for tax crimes, and a total restitution of $18 million. He is scheduled to appear in court on May 14, but remains free on bond under gambling addiction treatment and avoiding contact with bookmakers or gambling organizations. Ohtani was allededly not involved in any wrongdoing and was unaware of the theft.
b. 🤝 FTX to fully reimburse all its customers
FTX, the cryptocurrency exchange that collapsed two years ago, is set to reimburse nearly all of its customers, with some potentially receiving more than they are owed. In a recent filing to a U.S. bankruptcy court, FTX estimates having between $14.5 billion and $16.3 billion to distribute to customers and creditors worldwide.
After settling claims, the plan allows for additional 9% interest payments for most creditors. Investors who traded cryptocurrency on the exchange at the time of its collapse may still face losses due to the soaring prices of crypto since the collapse. However, customers and creditors claiming $50,000 or less are expected to receive about 18% more than their claim amount.
BUSINESS
c. 🎬 Disney and Warner partner up
Disney and Warner Bros Discovery announced on Wednesday that they’re offering a bundle of Disney+, Hulu, and Max (equivalent to Crave here in Canada) streaming services in the U.S. this summer. Customers can sign up on any of the three websites and choose between ad-free or ad-supported plans.
Both companies aim to strengthen their streaming businesses amid the decline of traditional cable TV. The bundle aims to simplify payments with one bill and may offer a discount compared to separate subscriptions, and allows access to both Max and Disney+ apps. Further details will be announced soon.
d. ☕️ Nestlé invests $197 million in Brazil
Nestlé plans to invest 1 billion reais ($196.5 million) in Brazil by 2026 to boost production capacity and out-of-home sales of its Nescafé brand. The brand aims to offer higher value-added products and ‘cater to the evolving preferences of Brazilian consumers’, who are becoming more interested in premium coffee.
Most of the investment will go towards expanding out-of-home coffee, with plans to double the number of coffee machines within the next four years. The company is targeting young consumers as a key demographic, because of their ‘significant contribution’ to coffee consumption. Nestlé believes Nescafé sales will grow 15% annually in Brazil’s retail market, which would beat the overall market.
POLITICS
e. 🇷🇺 Russia seizes Western banks’ assets
A Moscow court has just authorized the seizure of $13.34 million in assets held by a European subsidiary of JPMorgan and Germany’s fourth-largest bank, Commerzbank, in Russia. The ruling, issued on April 26, came into effect this week and stems from U.S. sanctions against the Russian bank Transkapitalbank.
Banks in the West have faced ongoing concerns about their assets in Russia amidst the Ukraine conflict, as well as the sanctions that followed. According to reports, Western banks still operating in Russia are paying up to 4 times more taxes than domestic banks. Since the invasion, over 1,000 companies have completely left Russia, but JPMorgan and Commerzbank have only reduced their presence in the country.
f. 🇨🇦 Federal Liberals give Costco $15 million
NDP Leader Jagmeet Singh criticized the federal Liberals this week for giving nearly $26 million to Costco and Loblaws for energy-efficient appliances from the low-carbon economy fund. This isn’t the first time this happened though. In 2019, Lobaws was given $12 million for energy-efficient refrigerators and freezers.
Environment and Climate Change Canada data revealed Costco received over $15 million, while Loblaws recieved a little over $10 million. Singh argued that it’s hypocricy for the government to give subsidies to profitable corporations while Canadians can barely afford food. The Conservatives slapped back by saying the NDP-Liberal coalition indirectly allowed these subsidies to pass.
📚 Book of the Week
Note: I don’t recommend books that I haven’t read or that I would never read. The books I recommend are books I have already read or that I will eventually read.
Hatching Twitter — Nick Bilton
Book Description:
The San Francisco-based technology company Twitter has become a powerful force in less than ten years. Today it’s everything from a tool for fighting political oppression in the Middle East to a marketing must-have to the world’s living room during live TV events to President Trump’s preferred method of communication. It has hundreds of millions of active users all over the world.
But few people know that it nearly fell to pieces early on.
In this rousing history that reads like a novel, Hatching Twitter takes readers behind the scenes of Twitter’s early exponential growth, following the four hackers—Ev Williams, Jack Dorsey, Biz Stone, and Noah Glass, who created the cultural juggernaut practically by accident. It’s a drama of betrayed friendships and high-stakes power struggles over money, influence, and control over a company that was growing faster than they could ever imagine.
Drawing on hundreds of sources, documents, and internal e-mails, Bilton offers a rarely-seen glimpse of the inner workings of technology startups, venture capital, and Silicon Valley culture.
As of Jan 31, 2024, (resulting from my Amazon.ca Associates account being terminated) I do not earn any affiliate commissons from the links below.
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I have another stock analysis on Alimentation Couche-Tard (TSE: ATD) planned for next Monday. Until then.
— Jacob
This is my opinion and my opinion may be shareholder biased. Always conduct research and proper due diligence before investing.
Found by multiplying the $36.20 billion in volume this quarter by four, rounded to the nearest whole number.