Shopify is high quality with accelerated growth and AI-commerce tailwinds, but at $160 per share and 112 times operating profits it is not worth owning now; fair value is about $100 a share, with 35-45 times earnings defensible, and only a sell-off near $100 would justify a tracking position.

So, a year and a half ago, I pitched Shopify to you and called it one of the best businesses we'd ever studied and then told everyone not to buy it. And the stock has nearly doubled since.

And that's because the business has done absolutely phenomenal since then. We're talking five straight quarters of 30% plus growth at a $115 billion GMB per quarter scale.

And along the way, it's become a big part of how AI agents shop online. and is it possible that the stock is still worth owning at double the price today?

Shopify was arguably a mistake of omission. So, we passed on it when perhaps we shouldn't have. I actually think Shopify might be one of the most interesting companies out there right now when it comes to AI actually showing up in the real economy.

But apart from Meta, most other companies probably seem that they're more threatened. And Shopify definitely does not belong to those. So, while we were away curating their businesses, Shopify became the company setting the standard for how AI agents buy things on the internet and shopping with AI agents, or what people nowadays call agent e-commerce, is something that I talked a lot about in my episode on Meta and Shopify is pretty important piece of the puzzle for understanding how AI may shape the future of shopping if that is actually where we're supposed to go.

And at the same time, the business has accelerated to growth rates it hasn't seen since the pandemic, and the valuation question has, if anything, only gotten harder and a lot more interesting too, I think.

And so, Shopify is the world's leading commerce platform. And basically, it is the software that lets anyone, whether you're a first-time founder working from your kitchen table, or your brand like Skims, Supreme, and actually even now General Motors and and Starbucks all have their merchandise stores run through Shopify.

Uh and so, with Shopify, anyone can build their virtual storefront, process payments, manage inventory, handle shipping and taxes, sell online, in person, on social media, and now even inside of of AI chatbots, all from one platform.

And so, they power millions of businesses across 175 countries, and over 14% of all e-commerce in the United States flows through Shopify merchants. It feels like Amazon has been there for basically eternity, and Shopify only came up 10-15 years ago, at least that's when it came onto my map.

And now they're supposed to be there for 14% of e-commerce in the US, which is just absolutely uh tremendous.

Yeah, so there are two engines, and one is called subscription solutions, and that's pretty straightforward. There's a a software fee for for using Shopify, where merchants pay anywhere from as low as maybe $39 a month to for enterprise clients, thousands of dollars a month through product called Shopify Plus.

And and so the subscription business is the smaller, but very much the steadier engine powering the company, because you kind of know every month you're going to get these recurring cash flows.

The bigger engine though is is what they call merchant solutions, where Shopify takes a small cut of the actual commerce flowing through the platform. So, that might be payment processing above all, but also things like lending through Shopify Capital, or offering discounted shipping labels, facilitating currency conversion, providing advertising tools, those kind of things.

And to me, that's a really basic illustration of of what both Shopify and Intuit can do as as these fintech platforms. Where basically, it you know, tells you for every dollar of merchandise that Shopify's merchants sell, the take rate is how many cents Shopify actually keeps for helping facilitate the transaction in different ways from, you know, managing the website to even helping with the logistics.

So, all the business units that you basically just talked about, right, that sort of vertically integrate the business into what a merchant then does is a way to have a lever to take up the take rate, because you get more and more important for the merchant.

So, for Shopify, that number is currently roughly 3 cents on the dollar and about 0. 8 cents of that is coming from subscriptions and then 2.2 cents for merchant solutions on average.

So, a big part of the bull case was, you know, that this take rate would slowly creep up over time as Shopify attaches more services to more of their merchant customers because again, it's, you know, leverage that you have compared to the merchant.

And I want to go back to a quote that we talked about last time because I think it gives some insight into how Shopify internally, at least, perceives itself and in the words of Shopify's CEO, Tobi Lütke, he said, "Amazon is trying to build an empire and we are trying to arm the rebels."

That's basically where you have this, you know, picture of what Shopify is doing.

And I think that framing made a lot of sense, especially during and shortly thereafter, because, you know, you had all of these e-commerce companies and just merchants going into e-commerce, selling online.

It's a great point and and let's get to what the business has actually done over the last year and a half as its stock has doubled. And so, when we covered Shopify, revenue was growing at about 26% a year and the big question was whether that growth could last.

And well, it definitely did not slow down, it sped up and and actually by a lot. For 2025, gross merchandise volume, that the total value of everything sold across Shopify, hit $378 billion, up up 29% and then the revenue crossed $11.5 billion, which was up 30%.

That's Shopify's fastest annual growth rate since the pandemic and then free cash flow hit $2 billion.

Now, I think it's safe to say that 2025 has been a a pretty good year for Shopify, but I heard 2026 is only supposed to be getting better.

Well, somehow, yes. Q1 revenues grew 34% and Q2 the company literally titled its press release as Shopify delivers big and they did. They they delivered $116 billion of gross merchandise value in a single quarter and that was up 32%.

You had gross profit up by almost a third, operating income up by 2/3 and then a pretty healthy free cash flow margin.

And so, management called it a monster quarter, but now that they've hit five quarters in a row of of 30% plus gross merchandise value growth, I would say it's been a monster year and more.

I think it's quite remarkable when you look at the scale of Shopify, right? They did more revenue in the fourth quarter of 2025 than they did in the entire year of 2020. That's only five years apart, right?

So, one quarter was bigger than the whole pandemic boom year, which anybody who looked at the markets back then, we know that, you know, especially e-commerce companies and also payment companies, they had a good year in 2020 when the pandemic hit.

And even better is that this is coming across the board. So, it's not only one region growing. North America grew 28%. Europe actually outpaced that by going 34% excluding currency swings and in-person sales grew about 32% and then B2B, which is, you know, wholesale commerce between businesses, which barely existed on Shopify just a few years ago, that grew 76% in Q2 after already doubling the year before.

All right, just to be absolutely clear, 76% growth in B2B is is absolutely wild. there are not that many businesses that we cover but can, you know, pull off those numbers, especially at the scale of Shopify.

Since we're dropping off stats right now, here is another incredible one because according to the company's CFO, since the start of 2025, Shopify merchants have captured nearly half of all incremental e-commerce dollars in the United States.

So, we're not talking about half of all e-commerce market share, obviously, you know, in total, but half of all incremental growth. And that's really something, right? I mean, there's a whole lot of growth in the last couple of years, especially in e-commerce, and half of that is going to Shopify.

So, for every new dollar of US e-commerce spending in the last year, roughly 50 cents has gone through Shopify's store.

So, when you match that up with what we thought would happen for Shopify, I mean, gosh, we we did look incredibly bearish. And under the hood, the core dynamics propelling Shopify's flywheel do seem to be speeding up.

And and if you just look at the companies from the past two quarters who have signed on to Shopify, you get a pretty good idea of how that's gone. I mean, we're talking General Motors, Starbucks, L'Oreal, Estee Lauder, Coach, Michael Kors, Keurig, Dr. Pepper, Sonos, Amer Sports, which owns Wilson and and Salomon, uh Guess, Avon, Claire's, and Canada Goose.

And so, switching e-commerce platforms as a large enterprise is is really no joke. So, it's a testament to Shopify being able to pitch merchants on this being their final migration, uh Shopify being their perhaps their forever home, and that being uh enough to justify going through all the trouble of of switching

I mean, internally, when you think about all the employees, right? If you tell them that you have to switch those providers every 6 months, um I think they wouldn't like that message too much.

uh yeah, let's look at the the second piece of Shopify's flywheel coming to life, and we can see that in their customer retention and cohorts. And so, merchants who reached $1 million in annual sales on Shopify have a 92% retention rate.

And then at $10 million, it's 97%. And then, if we look at their cohort data going back to the first quarter 2015, so 11 years ago, that cohort of customers is now doing 3.3 times the quarterly revenue it did back then.

So, customers are spending more money with Shopify over time. And And so, these old customers just keep spending more, and then new cohorts come in and and get bigger and bigger.

And And those layers stack on each other, and that's a huge part of why the company has had this incredible success as a compounder.

But obviously, you know, you have the much larger, especially if you look at the retention rates, um lock-in if you use Shopify. And it's way more powerful because of all the verticals that it's integrated in with, you know, you're spending money as a merchant on Shopify.

Especially if you look at that 2015 cohort stat, it's kind of incredible. Over three times is what they were doing 11 years ago, right?

>> I I would say that we're we're overhyping Shopify, but I I I do I mean, I think the numbers speak for themselves. And And the the third point that that I would make is that uh to best illustrate their their flywheel working would be on the payments front.

And so, Shopify's payments now process 68% of all of the gross merchandise value that goes through their platform, goes through their customers. And that's up four percentage points in a year. And it's also live in 40 countries now.

And and with Shop Pay, this is their one-click customer checkout. Uh that crossed $400 in lifetime volume. And and now handles more than half of Shopify's US payment volume.

So, that's really uh we keep using that word incredible. Uh and it really is. And uh the other thing we talked about in our original episode was this idea of of their take rate creeping up over time.

Uh and we've seen that unfold, too. Uh namely, uh with the merchant solutions, the take rate went from about 2. 2% early last year to 2.4% a year later. And it sounds like a really tiny change, but on more than $400 of sales a year, every hundredth of a percentage point is worth roughly 40 million in revenue.

>> Just looking at how much volume they process, their own payment system is incredible. If you look at a lot of payment companies and you see how much more competitive the market gets, and then you see a player that's generally in e-commerce, like Shopify, generates so much money through their payment system itself, it's just it's an incredible stat, you know, there's this word again, but so far, I think we can summarize it that way.

It sounds like we were, let's say, directionally right to be so optimistic about the business, but maybe we didn't fully appreciate just how well things could or would work out and go for them, at least in the short term.

And I think a takeaway for me is that if you're going to underwrite numbers that just jump off the page, like Shopify has achieved, you have to have a ton of conviction. And you know, otherwise, you just risk being massively off.

And that's a quite scary thing if you overpay for a company,

When we first covered Shopify, it still had convertible notes outstanding and obviously also a history of diluting shareholders every single year. And since then, when I look at the balance sheet now, they repaid the convertibles almost entirely in cash.

I think it ended in 2025 with about $6 billion of cash and investments and zero debt.

And then in February of this year, the board authorized Shopify's first ever share repurchase program with $2 billion of capital, then added another $3 billion in June. And so it's $5 billion in total by now.

And about $1.9 billion, so almost two, was already executed in the first half of 2026. So it's not a modest amount of stock that they are buying back, but obviously you got to tell me what do you think about it in terms of the variation today.

>> It's a big shift for a company that that used to dilute shareholders pretty massively every single year. I mean, that was one of our biggest concerns with Shopify. And you know, I expect the share count will will continue to decline going forward or at least probably be flat now that they've set this precedent with buybacks.

There'll be a lot of pressure to continue to ensure that they're buying back enough to to make sure that stock based comp isn't creating any increases in the share count.

And and then the debate is always that, you know, hey, if you're growing so fast and everything's working so well with the business, why would you not put the cash toward reinvesting into the business rather than purchasing shares at 100 times earnings, right?

And so basically, you'd be pouring money back into projects that might actually help to justify that sort of ridiculous 100 times earnings multiple.

>> So for the first time in its public life, it is true that Shopify's buybacks are roughly offsetting stock based compensation. So even $5 billion is modest next to a $200 billion company.

But symbolically, this is a company that is, you know, crossing from the cash burning disruptor phase of its life into the self-funding compounder phase, right?

And usually, it marks a permanent change in how the market treats the stock. So even if I don't necessarily like the idea of putting money into buybacks at 100 times earnings, at least it's a good sign for me that they are more careful now thinking about diluting shareholders.

Even if of course, we have to repeat that the money they are spending right now, well, that's money that otherwise would have paid either into the business or maybe as a dividend to for example, paying out shareholders.

So that's I think our opinion on, you know, what do you do with $5 billion if you trade it 100 times earnings.

Now, let's talk a bit about the valuation in our original episode. So, I didn't think your assumptions came off as modest by any means. I would say at least that's what I felt back then when you pitched the stock for the first time.

But, you were pretty clear that the stock was priced for perfection.

In this case, I can't even in good conscience put numbers into my model that spit out the the current share price. It just feels too optimistic. And maybe it wouldn't feel that way if I had a deeper understanding of e-commerce.

I just don't have a ton of insight into that world and and certainly not enough to be comfortable underwriting the necessary growth to justify Shopify's current share price as is implied by maybe a reverse DCF that you might do on Shopify to look at what the market kind of expects.

So, I am recommending we hold off on Shopify, ironically as the person who's pitching it. But, if we get a price south of maybe $60 per share, which would be a considerable discount from where the market is currently trading.

It wouldn't be an unprecedented sell-off for companies with a stock as volatile as Shopify's. But, it would have to take something like that, like a 30% or more sell-off, maybe even a 40% sell-off, for me to really seriously revisit the decision to add Shopify to the portfolio.

Obviously, I was too conservative in hindsight. But, but I think there are a few different points to consider here beyond simply saying I was wrong or right. Uh if we're talking about whether we misunderstood or underappreciated the quality of the business, I I would mostly say no. And and so, for example, we we talked about the Innovator's Dilemma dynamic that would carry Shopify upmarket and enterprise.

And that very much has happened. And it's actually happened even faster in in a bigger way than we thought.

And we also said Shopify's take rate would creep up over time, and so far it has. And And we said the moat was focus on switching costs, plus a network effect with their app store.

And their retention figures I think show this all best. We We mentioned that they are having, you know, 92% to 97% retention, depending on the customer. So, on that front, things things look pretty good.

>> I think generally it's just incredibly difficult to figure out what something might be worth if everything works out perfectly. So, you know, usually you have this twin engine of, you know, earnings growth, and them going up meaningfully, actually.

And then the market getting excited about that, pushing up the multiple, too. And then you end up these massive price jumps, especially in a short amount of time. And we often say that, you know, great companies surprise you to the upside, and Shopify certainly did that.

But you can't model that when you also want to have a margin of safety, right? Which is why I'm generally quite hesitant to just, you know, put a flat 20% margin of safety discount at the end of my model.

But even then, you have to still be conservative in your assumptions. And actually, even more so if you don't use these, you know, flat-out discounts.

>> And another thing I I would like to ask myself for any investment decision audit that I do is, were we wrong about the numbers? And And on that end of things, I think you can more clearly point to what we had modeled and and say, yes, we were, right?

I I thought Shopify was transforming into a more mature company, and that would mean that growth would decelerate. And Instead, as we talked about, growth has actually accelerated.

So, even just looking out to to 2026, I actually ended up underestimating their revenues by what will probably shake out to be about $2 billion. And being so far off in such a short period is it's humbling.

But because I hadn't, I defaulted to conservatism and I still think that's the reasonable thing to do to hedge against your own ignorance when you don't always know what you don't know, and we don't like to put too much weight on our models anyways.

>> You know, I think the the general idea or the wisdom is that if you need a complex model and you need it to, you know, figure out exactly what the stock's worth, probably the opportunity is just not that great.

And if you do your model and it actually means, you know, this company is highly overvalued, there's an even higher likelihood that most of the time you will not earn a lot of money or, you know, good return investing in that company.

(30:07) And if we look back at an episode from a year ago and feel like we have a much better understanding of the industry and the company now, I also take that as a good sign, right?

I mean, I'm more interested in, you know, reflecting on our decision-making process over time. And when we think we have evolved as investors and we know the industry and the company better, I think we made our job actually.

>> If we give ourselves some credit, I mean, the market was asking us to pay more than 100 times trailing operating profits for Shopify in May of 2025, and we said that price embedded a best-case future, and and we wouldn't pay it without a margin of safety, and I think that was pretty reasonable, right?

I have my own biases, but I think that stands up and as we mentioned it just so happened that the best case showed up you know, actually what happened was better than anything I imagined in my best case model.

And so if you refuse to to pay for perfection and then the company delivers it, yeah, you're going to look wrong. But as a matter of process and survival as an investor and avoiding catastrophic wipeouts, you can't expect to last long if you buy every stock that's priced for perfection.

And so to your point, I mean there's something to be said for giving a company credit for their track record as in Shopify's case, but maybe not too much credit as in the Trade Desk case.

And so I don't know, that's just a really fine line to to balance.

it's not like the chance to invest in Shopify has completely disappeared, which is why we're meeting today discussing the opportunity.

And Shopify's CFO makes a useful distinction here. So, he says, "Most of what's happening today is more like LLM-driven discovery." So, you know, people starting their shopping research inside the chatbot, you know, instead of, for example, Google, but the full version where you give the agent basically a budget and then it proactively buys things for you.

That seems closer now due to Meta's Muse, but it's not yet fully there and we don't know whether that will be the case in at least the near future.

And that's exactly the kind of stuff that Shopify merchants actually sell. So, it's specific high consideration products. whether we appreciated it or not, I think Shopify has has seen this for some time and they've been building for it for at least 2 years.

And then over about the last 9 months they they rolled out a lot of what I'll call maybe the basic plumbing for AI shopping

so in other words it makes every Shopify store very easy for AI assistants to understand so Shopify CEO has a really good line about this everyone else he says has to scrape the internet for product data basically sending bots to read web pages while Shopify is the source of that data and so that matters more and more because AI searches powered by catalog turn into purchases twice as often as ones that rely on scraped web pages

and when you shop inside of chat GPT today what you're basically doing is you're browsing Shopify's catalog Catalog hands it clean product data instead, which is a great example of AI tilting things in Shopify's favor in the long term.

actually Shopify and Google worked on this and and launched it together in January as an open standard. basically allows agentic commerce to happen without ChatGPT or Claude stealing the customer relationship from retailers and and merchants.

of course, Amazon wants its own shopping agents to catch on, which means those agents need to be able to work outside of Amazon. And so, a common standard that all the big tech companies are aligned on, that helps with that, uh, no matter who wrote it. case, one of their chief rivals, Shopify.

what is special for Shopify is that now any developer can build using the use CP and plug into Shopify's catalog, giving them access to all of Shopify's merchants with no approval needed.

So, every new AI shopping app anyone builds becomes basically another storefront for Shopify merchants to to sell through by default.

And it gives Shopify a ton of credibility that even Amazon decided it couldn't afford to ignore a standard that Shopify and Google had both written.

the early fear was that Google would eventually come for Shopify's payments business, and so Shopify co-wrote this standard precisely so that wouldn't happen.

And so, it's interesting that Shopify claims that it's currently the only platform that lets merchants sell directly within Chat GPT, Copilot, and Google. (45:51) And then you can manage that all from one place, of course, through Shopify.

Shopify claims that it's currently the only platform that lets merchants sell directly within Chat GPT, Copilot, and Google. And then you can manage that all from one place, of course, through Shopify.

So, I think the key point is that the chatbots don't cut Shopify out of the checkout process, where we talked about merchant solutions business is the biggest engine of growth for Shopify.

And then payment processing is the biggest part of that engine in terms of of driving revenue. So the payment processing angle is is really important for Shopify. And basically the the chatbot handles the conversation with the shopper, but Shopify still runs everything behind the scenes.

Processes the order, it takes the payment through Shopify payments, and then it helps get it shipped.

So, I think the key point is that the chatbots don't cut Shopify out of the checkout process, where we talked about merchant solutions business is the biggest engine of growth for Shopify.

And then payment processing is the biggest part of that engine in terms of of driving revenue. (46:17) So the payment processing angle is is really important for Shopify. And basically the the chatbot handles the conversation with the shopper, but Shopify still runs everything behind the scenes.

Processes the order, it takes the payment through Shopify payments, and then it helps get it shipped.

I would have never thought that I see you as excited about a payments business, but I got to say it kind of reminds me of Mckay Liberman, where the flywheel of having the e-commerce plus the payments is incredibly powerful.

And (46:43) obviously, and that's the most important thing to Shopify, you are keeping the take rate. So in this case, for example, ChatGPT is only the shop window, so to say.

it kind of reminds me of Mckay Liberman, where the flywheel of having the e-commerce plus the payments is incredibly powerful. And obviously, and that's the most important thing to Shopify, you are keeping the take rate.

So in this case, for example, ChatGPT is only the shop window, so to say.

so long as a dollar sold through ChatGPT pays Shopify the same as a dollar that goes through the merchant's own website, then Shopify is is going to do just fine in the age of a generative commerce and and maybe even thrive as perhaps our agents will drive more consumption.

when you look at especially Shopify's data, it looks like agents are becoming already more and more important. So putting some numbers on it, orders to Shopify stores attributed to AI search up roughly 15x since January of 2025.

And in Q2 alone, both AI-driven traffic and AI-attributed orders tripled year-over-year. And half of AI-referred sessions land directly on a product page. So that's basically where, you know, you have two and a half times the rate of traditional search.

So people are skipping a lot of the browsing. And then at a Goldman Sachs conference in I think it was September, the CFO said that shoppers convert roughly 80% better if they come through those AI rails, basically.

But then if you look at the total numbers, I mean for example, you have this crazy 75% of AI attributed purchases coming from outside of the top 100 product categories. (48:16) And that's insane if you think about it.

But AI agents, they match on specific intent. So, on an earnings call, for example, Shopify's management told there was a story about a parent searching for a screenless phone for their 10-year-old kid.

They were being led to a small Shopify merchant called Tin Can Phone and it's pretty much exactly what they wanted and yet if they would have searched through Google, they would have never found it.

(49:05) So, in some ways AI discovery favors these long tail of small specialized merchants and guess what? That's exactly what, you know, Shopify's customer base is.

And for context, they refer to just a kind of the generic brand, brand.com, is a company in their own website. So, think of any independent store running on on Shopify when you hear that.

But in regular Google search, traffic to those brand.com, those Shopify type sites, grew about two times faster than traffic to big marketplaces like Amazon, Wayfair, Chewy, and and Etsy.

Which is another one of those stats that sound incredible, but to be completely fair, it is what you would expect, right? I mean, the best Shopify brands should be outgrowing Amazon.

But, when they aggregated the traffic coming from AI platforms, this brand. (50:10) com was basically outpacing the legacy marketplaces by four to eight times. And and so, Morton has said he's seeing more brand.com sites in this funnel than ever before.

And and now it's showing up in in the measured data. And that data is what drove his conviction to upgrade the stock this year. And he said, "A quote, G&V is going to grow higher for longer than most people think. (50:35) "

Well, definitely for longer than than we thought last year. But, I think in other words, if you just want to put it more simply, AI chatbots are driving more traffic to small online stores, and not less.

But, the more that proves to be true, a successful Etsy seller might start asking, "Well, why am I paying 25% to be found when a Shopify store of my own now has a better chance than ever being recommended by Google's AI search or, you know, ChatGPT at basically a fraction of the cost?"

So, the fact that brand.com is outperforming Amazon on AI referrals is really a testament to the importance of what Shopify has built in in Shopify catalog.

And and the idea is that merchants defecting from Etsy will most likely eventually find their way to Shopify. And anyways, Shopify management has argued to this point, and I buy it, that stripping out the friction from buying and giving everyone what amounts to a personal shopper in their pocket will push more retail spending online.

(53:34) So, we'll see a higher percentage of all retail commerce occurring online. And And if that's even partly right, then the whole pie gets bigger for both Amazon and Shopify.

It seems like everyone does that, but actually in this case, I do think the logic for Shopify is pretty solid.

What scares me is that Amazon might have some aces up its sleeve that it could pull out to damage Shopify further if push really came to shove. And one of those, which we've already seen being the buy with Prime initiative.

I feel like for as bearish as this buy with Prime push seemed to be for Shopify, especially in a in a pre-agentic commerce world, it does seem like the AI era has just scrambled the old battle lines.

And so, the rails everyone is ending up on are again the ones built by Shopify alongside Google. And And you know, coincidentally, and I'm I'm completely speculating here, but within a few weeks of that announcement, we did see OpenAI shelf its instant checkout experiment that Shopify merchants have been plugging into since the fall of 2025.

And just a year or so, it seemed like there was a dichotomy between Amazon and Shopify, right? Long-term, one it seemed like would have to win at the expense of the other. But that really feels like a less accurate depiction of reality as AI improves and becomes more embedded in our lives.

I think the more accurate way to think about it now is the e-commerce pie will grow and and probably grow by a lot. And that's good for both of them. And yet, we don't know at this point how LLMs and agents will change the way we shop exactly.

So, that remains to be seen. And And whether that will favor one or the other is is possible. (57:10) It's possible that both will win, or it's possible that both will will lose ground to some competitor that doesn't even exist today.

But then if it actually ends up being a referral channel on the other hand, it's basically just a better version of Google search that, you know, allows the merchant to keep the relationship and the checkout and the data and therefore also most of the takeaway leverage.

So, I don't know, perhaps that's why Shopify's share slid from around 155 bucks to about 130 bucks after news was initially announced. (59:22) And then Amazon blocked news from shopping on its site.

While just the next day, Shopify basically announced, and I quote this, "partnering deeply with Muse to enable agentic checkout with Shop Pay on all Shopify stores." And then the stock took that as a pretty good sign, I think. It It rose 14% over the next 2 days.

But, just to to get back to to Shopify, apparently, it seems it agentic sales will carry the exact economics of any other online store transaction from a Shopify merchant because every Muse purchase on a Shopify store is going to run through Shop Pay.

So, in September, you couldn't have asked for a clear contrast between Shopify and Amazon. It really the first time a popular AI agent showed up at Amazon's door, Amazon turned them away, while Shopify has just doubled down on it and and opened every one of its stores to really be tied in with Muse.

And actually, we don't even know how, you know, Amazon and Shopify actually think about it, if they have a vision for how this is supposed to look in 5 years' time.

And Shopify claims its own cut will not change in the future, but that fee has to come from somewhere. We know that. in a world where AI writes the software, merchants will just vibe code their own Shopify and then uh stop paying tolls to Shopify as a middleman.

Uh but I just think that the market has taken things one step too far with that idea. I think you'll find that no one is actually trying to vibe code essential functions like the services that Shopify provides.

I mean, the savings are just so negligible compared to to the risks and and challenges of doing so.

I don't know, maybe that won't age well, but I I I I just that's the thing I'm most skeptical about. And I just don't think going it alone uh would even really save money uh because you're missing out on Shopify's scale, right?

So, Shopify, for example, has a better fee structure with Stripe than any individual merchant could ever negotiate. And so you lose that when you go off on your own to vibe code something.

And Shopify merchants get a one-click connection to Meta's ad tracking tools. And that's an integration that exists now because literally the CEO of Shopify and Mark Zuckerberg personally worked on that deal together.

I could definitely see how how Shopify offers enough value basically outside of the software to not be vibe coded away by anyone.

And as you said, you know, between logistics, the advertising and all that basically you know, behind the curtain work that has to be done by such a platform. It's almost impossible to imagine that anyone could vibe code any of this.

And it might limit their pricing power way down the line, but there are definitely businesses I'm a lot more concerned about than Shopify. We keep on talking about Michael Moritz and including him because I think he he thinks very clearly about Shopify.

And so basically he has argued that even with unlimited resources, an army of engineers, and a blank check from Anthropic, you could not rebuild it to be cheaper than just paying to use Shopify and enjoying all the benefits that come with that to to the point of getting volume discounts with with Stripe.

If you're a merchant who's selling on TikTok and Etsy and Amazon and also your own website. And then you've, you know, vibe coded this alternative stack to Shopify, and you run into a glitch on Black Friday.

Well, you're on your own, and your business is on fire, and you shot yourself in the foot just to save a few pennies.

what's your take on the other half of the AI story? You know, where the idea is basically that AI runs the merchant's business. So, this is Shopify's, I think, Sidekick product, if you want to call it that way, which is meant to be like an AI business partner built right into Shopify.

So, it knows your products, it knows your customers, your entire transaction history, and it can also actually build within your store. So, it edits your product photos, it analyzes your data, and it creates custom apps.

I I think it sounds pretty good, and usage seems to be pretty strong. I think daily active merchants using Sidekick is up three and a half times year-over-year. Daily sessions is up almost five times, and we have nearly 34 million conversations just in Q2 of this year.

And then you have 36,000 custom apps built by merchants through it in just a single year. So, that's basically triple to the prior quarter.

So, again, the numbers look insane, but what's your take on it in the long term? I mean, it's just nuts. I mean, for anyone looking around wondering how AI will actually impact productivity across the economy four years after the release of ChatGPT, I think that's a heck of an example.

And I've also read that with the help of Sidekick, nearly 10% of new shops powered by Shopify now make their first sale within a single day of signing up. And so, that share is up 43% in in just three years.

And when the Pope was elected, the Pope t-shirts were on sale within an hour. And so, Shopify calls it commerce at the speed of culture. And And every time it gets easier to start, Shopify's funnel of merchants just gets wider and and wider.

As someone who follows the company quite quite closely, I hope you got one of those t-shirts. I don't think he did because otherwise I would have seen it, but but it's a shame.

I got to say that and I probably feel a bit more mixed about it than than you, but just because Shopify's president has called them probably the most AI-pilled company in the world, meaning they've gone all in using AI internally.

And whenever you do that, especially at these times, and you come out with these incredible and almost to me it's seems like, you know, even if they're working quite well, they might oversell it just slightly.

To their credit though, I mean, headcount has been roughly flat for 2 years while revenue was growing 60-plus percent. And I can't say whether that's all thanks to AI, but you know, that formula is how operating expenses have been able to fall from 42% in Q2 of 2024 to 34% last quarter. So, that's a major major impact.

And that's the case, and I think it's fair because of that that you can make a case that AI is already showing up in a big way for revenues and margins, probably more than with any other company we've yet looked at.

But obviously that doesn't come for free, right? I'm sure Shopify's AI compute bills are just like completely crazy. And so Shopify's CEO has has actually acknowledged that rising AI compute costs from all that Sidekick usage are putting some pressure on on gross margins.

And so I'm referring to Adobe but I think that logic probably applies to Shopify as well. It might be although I got to say you know if you have the growth of Shopify I assume that the market will likely give you a bit more credit than Adobe has gotten in in the last couple of years

and you know how about we get to the valuation section basically the part that 18 months ago when you first looked at the company was the reason why we did not invest in you know one of the probably highest quality companies that we looked at here for the show.

So what do you think today the company Shopify is worth?

So yeah as you can imagine I had some updates to make to my model and we'll have that model linked to in the show notes below for anyone who wants to see it but besides revising higher their revenue over the next few years where I was really underestimating things the biggest change was setting their operating margins to increase to nearly 20% in the next 5 years up from 14% this year.

So that jump in margins enables operating profits to actually grow faster than revenues and that would be a wonderful thing for for shareholders and I also adjusted my model to reflect that Shopify we talked about this earlier has gone from being a massive net diluter of existing shareholders to you know thanks to buybacks being able to keep their share count flat.

And what do we think about the the twin engine so earnings growth at the multiple? What's the multiple that you're now putting on the business?

It's a good question and I decided this time to invoke the knowledge of none other than Ben Graham and basically he has a a price to earnings matrix where you look at the interest rate on triple A rated corporate bonds.

So, the the the highest quality corporate bonds out there and then your estimated growth rate for the company's earnings over the next couple years and then it spits out a multiple that you should be willing to pay for the stock and it's a it's a helpful heuristic and if we follow this very simple framework, then something like 35 times operating earnings is is probably a fair price to pay for a company growing like Shopify is.

Though, I I recognize that this is pretty conservative compared to how the market has historically valued Shopify. So, for the sake of argument, maybe we'd be more generous because, you know, Shopify is such a special company as we've found out today and even at 45 times operating profits per share though, the valuation number that I get just doesn't look great.

Unfortunately, we have the same problem that we did last year and at the time we first looked at the stock, it was trading at, guess what, 112 times operating profits. It's just an obscene number to even say.

It violates the senses of a of value investors and and well, today it trades at exactly 112 times operating profits.

So, >> [laughter] >> I I couldn't have made that up myself even if I wanted to and and as I say, Shopify has not grown into its multiple at all. The stock doubled because the earnings roughly doubled and the market just kept paying the same premium the whole way.

So, really anyone buying shares today is making the same bet that we passed on just from a higher starting point and the same need for perfection from the company going forward.

Shopify definitely delivered over the last year, but 112 times operating earnings means that you do not only expect it to continue the way it has in the last year. You actually expect it to get better and better.

Here, I think it will take us another couple of years in a market that finally says, "Okay, well, let's be a bit more cautious here and actually settle down to let's say 35 45 times earnings."

And I think if Ben Graham would suggest 35 times earnings, and we go with 45, I I think that's as far as we can go.

I think I don't know if Ben Graham would have ever paid 35 times earnings for any company, um but I don't feel too good even though Shopify's a fantastic business for paying 112 times operating earnings.

Yeah, I certainly wouldn't want to bet on Shopify basically continuing to operate perfectly. And and so, I don't know, maybe we haven't learned anything after all cuz we're at the same conclusion.

Uh I Maybe at the end of the day we're just too stingy of value investors to pay up for this company, despite us now basically devoting two full podcasts to primarily talking about how great it is.

And and this time uh I'm going to blame the father of value investing. Yeah, Ben Graham. And he's my cop out. I I I can't justify paying nearly twice the multiple uh he would recommend or really triple the multiple he would recommend.

Uh so, that's how I I'm going to sleep at night by not owning this company.

Um but it really is one that we need to be watching closely. And so, I'm sure I'll look terrible by saying that the company is is probably about fairly valued at maybe $100 a share.

Uh so, they have increased their intrinsic value dramatically in the last year, but shares are trading at $160 per share at the time of recording.

At some point, I'm hoping we'll get a big enough sell-off so we can gobble up a a bunch of shares. And if it gets close to $100, I would definitely be open to to opening a a tracking position.

Well, I think we, you know, spend such a long time working out how wrong we've been and you know that we underestimated Shopify. And this sounds like repeating the same mistake, but if I'm being completely honest, I don't fully agree with the notion that we were wrong anyway in the first place.

And it's not because I don't like, you know, considering past investment decisions a mistake. We definitely did that. We had an entire episode devoted simply to the mistakes that we committed in, you know, the last year and a half.

But we don't have to chase stocks that price in these best-case scenarios continuously.

We know how the markets work and at some point I'm pretty confident we will get a chance to buy Shopify at a price that seems more attractive to the two of us.

And especially at times where the whole market tries to figure out what impact AI and agents will have on e-commerce in general and, you know, in the long run. (1:15:22) And you know, I don't know.

One month from now they're on Shopify are, you know, the big AI losers and then the next month they are the big winners of AI. So I'm pretty confident we will have the chance to buy them at, you know, significantly better prices in the future.

The hardest problem in investing is not finding great companies. Shopify was never hard to identify as great. The hard part is that the market usually knows it, too. And you usually have to pay a price that leaves no room for error.

And so over some periods, the error never comes and and the price keeps working. But our job is just to keep showing up and saying honest and and be ready for those days when Mr. Market finally has a a bad reaction to something that the company has done.

And so for a year and a half our caution on Shopify has been indistinguishable from being wrong, I would say. And it may stay that way because this company is executing as well as any business on the planet.

But Marks is also warning everyone paying today's price that being right about a company too early or at any price can feel exactly like being wrong for a long, long time. And so, we would rather wait for what we think is is something closer to a fair price for a great company on our watch list than pay for perfection.

Payments is a thorny issue for many small businesses, or at least it used to be. And Shopify has made the process so much easier for them. And just to hit on it again, cuz whenever we talk about software companies, especially something as boring as enterprise software, it can all feel a bit abstract if you've never used the services yourself, which I haven't.

(1:19:00) But in short, Shopify is a platform designed for anyone who sell anything, anywhere, giving entrepreneurs the resources that for many years were only really reserved for larger corporations.

And since IPO'ing in 2015, Shopify has shown just how powerful its platform is by growing gross merchandise volume revenue by over 50X.