It has swiftly become one of the hottest companies in e-commerce, and after a massive year of growth in 2019, we look ahead to what 2020 will bring.
Tobias Lutke started Shopify (NYSE: SHOP) by accident in 2007 when he was trying to set up his own store for an e-commerce business. Shopify’s shares listed on the NYSE in May 2015, and has been one of the best-performing stocks of 2019 with a return of close to 200%. With a market cap of more than $56 billion, it is more valuable than Twitter (NYSE: TWTR), Square (NYSE: SQ), Spotify (NYSE: SPOT) and even surpassed eBay (NASDAQ: EBAY) this year.
Investors are excited to see if it can challenge Amazon’s (NASDAQ: AMZN) e-commerce dominance. Shopify has successfully been able to equip its businesses with the same technology and capabilities as Amazon, but with more control. Most of the shoppers who transacted with 800,000 merchants on the platform had no idea they were dealing with Shopify instead. The part where Shopify distinguishes itself from Amazon is where retailers can tailor their own stores and maintain a close relationship with their customers. Shopify merchants can use their platform to even sell on Amazon. Its integration with social media is a big win as platforms like Instagram and Pinterest (NYSE: PINS) have become vital to growing online retail.
Shopify has largely stayed in shadows by not directing the end consumer to its own website and selling directly, but it has substantially grown its subscriptions. Premium rates go up to $2000, which constantly adds to its recurring revenue. Revenue growth for Shopify is projected to grow at 43%, twice as quickly as Amazon. But unlike Amazon, which has its own cash making machine (Amazon Web Services) it’s still far away from profitability.
Shopify Plus was launched in 2014 to give hyper-growth businesses a customizable enterprise solution. It can handle over 10,000 transactions per minute and serves with a personalized and dedicated help team from Shopify. The premium service has been doing well as a different segment, as it is used by much larger merchants who often migrate from their expensive and complex legacy solutions and get more functionality. Shopify has, over time, built a network effect moat as it has a rich ecosystem of app developers, theme designers and other partners, such as digital and service professionals, marketers, photographers, and affiliates have evolved around the Shopify platform.
Shopify is one of the biggest beneficiaries of the growing e-commerce market, while subscription revenue grown in double digits for the last few years. Monthly recurring revenue (MRR) grew 33.8% to $50 million from last year. Gross Merchandise Value (GMV) the total amount of sales recorded by all the vendors across the platform grew from $28 billion to $40 billion for the last three quarters. Its other revenue stream, the merchant solutions which includes payments, transaction fees etc has been growing substantially and now it stands even higher than the main subscription business. This was originally meant to be a complementary segment, and typically have lower gross margins than the subscription business. But this revenue stream is considered beneficial as it requires significantly fewer sales, marketing, and R&D expense. Growing this stream even further might lead to an early profitability path.
Shopify in the coming years is going to benefit from a few trends which are shaping the e-commerce industry. Influencer marketing, personalization, video/interactive content etch are a few examples. Shopify has very well integrated these things into its platform, offering its customers a valuable SaaS product.
It has recently launched its own fulfillment network offering to take merchants logistics and warehousing needs and is going to focus on expanding that segment in 2020. Logistics is a big problem in the e-commerce world. Especially for the smaller merchants who find it hard to keep up with the business of shipping, returns & storing inventory. This is something that worries investors as it moves on to a path similar to Amazon.
Spotify recently bought 6 River Systems, a warehouse automation tech developer to step up its sales supply chain for $450 million. The e-commerce logistics business is a battle that is hard to win, and it is going to be a bumpy ride for Shopify. Another potential hurdle is Facebook (NASDAQ: FB) pushing itself into e-commerce by creating Instagram checkout options and selling product options on Facebook stores which allows people to buy items in posts without leaving the apps.
Spotify Earnings Preview
Shopify will announce its earnings for the most recent quarter on Wednesday, 6 May. The consensus EPS Estimate is -EUR0.48 versus-EUR0.79 a year ago and the consensus Revenue Estimate is EUR2.01 billion, up 33.1% year on year.
As of May 5, 2020, Shopify stock is up 158% year-on-year.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Shopify. Read our full disclosure policy here.