Shopify Overview
Shopify Inc. provides a multi-tenant, cloud-based, multi-channel commerce platform for small and medium-sized businesses (SMBs)
Merchants use the company’s software to run their business across various sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces.
Shopify’s platform enables merchants to manage products and inventory, process orders and payments, ship orders, build customer relationships and leverage analytics along with reporting from one integrated back office.
Moreover, Shopify hosts a huge database of merchant and customer interactions. Merchants leverage this transactional dataset to get meaningful insight into the sales channel growth prospects and consumer behavioral aspects. This improves their ability to target prospective customers more easily, which drives sales growth.
Apart from the company’s own payment solution, payment wallets like Apple Pay, Google Pay is also available to the merchants, which they offer to customers for completing transaction done on the Shopify platform.
In 2019, revenues came in at $1.578 billion. The company generates revenues from two sources: Subscriptions Solutions (40.7% of 2019 revenues) and Merchant Solutions (59.3%).
Subscription revenue is recognized on a ratable basis over the contractual term. The terms range from monthly, annual or multi-year subscription terms. The company earns revenue based on the services it delivers either directly to merchants or indirectly through resellers.
Shopify generates the majority of merchant solutions revenue from fees that it charges merchants on their customer orders processed through Shopify Payments.
The company also derives merchant solutions revenue relating to Shopify Shipping, Shopify Capital, other transaction services and referral fees, as well as from the sale of Point-of-Sale (POS) hardware.
Reasons To Buy Shopify
Shopify is focused on international expansion, developing their merchant base, adding new functionalities, nurturing a rich partner ecosystem and having a user-friendly mobile application.
- Gigantic Total addressable market and Rapid Adoption. According to market research firm eMarketer, global retail e-commerce sales (excluding travel, restaurant and event ticket sales) are expected to increase to $893.4 trillion by 2022, which will make up 14.8% of total retail spending. I believe that the massive growth in e-commerce spending bodes well for Shopify. The company’s cloud-based platform is well-positioned to address the growing needs of merchants at a time when social media, mobile devices and data analytics are transforming the e-commerce market place. Moreover, COVID-19 pandemic has altered consumer spending behaviour considerably and induced online store creation. Shopify is well poised to benefit from growth in the number of merchants as more of them join the platform due to COVID-19 induced shelter-in-place guidelines. Moreover, growth driven by e-commerce boom and increased buying of essentials on account of the pandemic favours prospects.
- Shopify helps in improving customer’s brand loyalty, which drives merchant revenues. Shopify’s biggest USP lies in the fact that it is a brand-oriented platform as compared with an online marketplace. Here, the brand hogs the limelight, which helps the merchant win customer much faster through focused interaction. Further, I note that Shopify hosts a huge database of merchant and customer interactions. Merchants leverage this transactional dataset to get meaningful insight into the sales channel growth prospects and consumer behavioural aspects. This improves their ability to target prospective customers more easily, which drives sales growth. Management noted that merchants on average became more successful on Shopify, as the number of merchants with GMV exceeding $1 million grew 44% in 2019. In second-quarter 2020, GMV of $30.1 billion surged 119% on a year-over-year basis. The company’s plan to invest in leveraging this transactional data will further enhance the merchant’s ability to attract customers going forward. I believe that the company’s merchant focus strategy will aid it to dominate the SMB eCommerce market in the long run.
- Increased Innovation and Improvements to Aid Merchants Experience. Moreover, the company continues to add functionality to its platform, which is responsible for driving the merchant base. The launch of Shopify Payments, Shipping and Capital has made it easier for merchants to process payments, ship products and secure financing for their working capital needs. Notably, the percentage of merchants using Shopify Payments grew every quarter throughout 2019. The company has introduced Shopify Payments across 15 countries to date. Moreover, merchant adoption of Shopify Shipping continues to expand in both the U.S. and Canada. Management anticipates this trend to continue as the company expands shipping partners and add new features. Further, the company recently rolled out Shopify Fulfillment Network in the United States, for the first time, to facilitate commerce. Moreover, the acquisition of 6 River Systems is anticipated to boost the growth of the company’s fulfilment network. Also, partnerships with Walmart and Facebook are expected to expand merchant base. I believe that its merchant focus business model will help it to achieve its growth target in the long haul.
- Increased Payment Options and Applications. Notably, net new merchants on Shopify are expected to improve as newly added sales channels like Google Pay, Facebook Messenger, Instagram, Pinterest, eBay and Amazon continues to attract new merchants. Shopify noted that the addition of Houzz, Wanelo, eBates and others has pushed the number of channels over which a merchant can sell to more than a dozen. The company also noted that merchants are buying more apps through the app store, which is positive. Shopify app store currently offers around 4,600 apps. Moreover, the availability of Apple Pay and the addition of Canada Post are some other notable developments that will boost merchant base.
- Shopify’s Rich Partner Ecosystem is a Growth Driver. The company noted that the Monthly Recurring Revenue (MRR) per merchant surged 21% year over year to $57 million as of Jun 30, 2020, primarily on strong growth in Shopify Plus subscription base. Shopify Plus accounted for $16.6 million, representing 29% of MRR compared with 26% in the quarter ended Jun 30, 2019. The company’s plan to offer variable pricing structure under Shopify Plus is also a prudent move, in our view. I also believe that the company’s strong partner referral system will boost merchant base that will eventually drive top-line growth in 2020. More than 30,300 partners referred merchants to Shopify in the past 12 months.
- Mobile Focus Provides Significant Leverage To Shopify. The company launched its iPhone-based Shopify Mobile application way back in 2010. Also, the company released Shopify Ping for Apple’s iOS devices, which is compatible with Facebook and Instagram ads and is enabled for Apple Business Chat. I note that Shopify is benefiting from retail’s rapid transition to mobile and social sales channels. I believe that this rapid growth presents significant opportunities for Shopify in the long term. In fact, the Shopify platform garnered GMV of approximately $2.9 billion in the Black Friday-Cyber Monday period in 2019. Notably, year-ago GMV figure in the same period stood at $1.8 billion. Management noted that around two-thirds of online orders from the U.S.-based Shopify merchants were registered via mobile devices.
- Shopify has a Strong Balance Sheet with Ample Liquidity Position and No Debt Obligations. As of Jun 30, 2020, Shopify ended the reported quarter with cash, cash equivalents and marketable securities balance of $4 billion compared with $2.36 billion as of Mar 31, 2020. The increase can be attributed to net proceeds worth $1.46 billion from the offering of Class A subordinate voting shares in the reported quarter. Shopify generated net cash flow in operations of $80.2 million for six months ended Jun 30, 2020, compared with $47.4 million for six months ended Jun 30, 2019. Increasing liquidity trend and strength in cash flow reflects that the company is making investments in the right direction. Since it carries no long-term debt, the cash is available for pursuing strategic acquisitions and investment in other growth initiatives.
Reasons To Sell Shopify
Shopify’s a new player in the traditional e-Commerce market and a concentration with SMB coinciding with a lack of larger retailers remains a headwind.
- Shopify is relatively a new player in the e-commerce marketplace. Although it is not a direct competitor to behemoths like Alibaba and Amazon, many of its customers are. This presents a significant risk for its growth prospects.
- Moreover, the company focuses on the SMB segment which is more susceptible to macro-economic headwinds and consequently challenges.
- Furthermore, the lack of big-shot international customers is a headwind for Shopify. The company doesn’t have a significant presence in the Asia-Pacific market, which is the fastest-growing retail e-commerce market according to eMarketer. This is a major deterrent in our view.
- I believe that increasing investments on product development, Shopify Plus and cloud infrastructure will make it difficult for the company to sustain profitability. Moreover, it expects to further increase research & development (R&D) expense. Markedly, management intends to invest $1 billion over the subsequent five years to develop the new fulfilment network, which is likely to impact margin expansion. I also note that Shopify has been incurring losses in the last three years and has an accumulated deficit of $299.7 million as of Jun 30, 2020. Despite the improving top line, mounting losses might dent investors’ optimism.
Shopify’s Earnings and Revenue
Shopify Q2 Earnings Surpass Estimates, Revenues Up Y/Y
Shopify Inc. reported second-quarter 2020 adjusted earnings of $1.05 per share. The company had reported earnings of 10 cents in the prior-year quarter.
Total revenues improved 97% from the year-ago quarter’s figure to $714.3 million.
COVID-19 pandemic has altered consumer spending behaviour considerably and induced online store creation. The top line benefited from growth in the number of merchants as more of them joined the Shopify platform due to COVID-19 induced shelter-in-place guidelines.
Quarter in Detail
Subscription Solutions revenues (27.5% of total revenues) surged 28% to $196.4 million driven by persistent growth in Monthly Recurring Revenue (MRR) due to the addition of new merchants. Moreover, strong app growth and Shopify Plus variable platform fee revenue growth were positives.
As of Jun 30, 2020, MRR was $57 million, up 21% from the year-ago quarter. Shopify Plus accounted for $16.6 million, representing 29% of MRR compared with 26% in the quarter ended Jun 30, 2019.
Merchant Solutions revenues (72.5%) advanced 148% to $517.9 million, primarily on growth in Gross Merchandise Volume (GMV) that improved 119% from the year-ago quarter’s figure to $30.1 billion.
Gross Payments Volume (GPV) came in at $13.4 billion, accounting for 45% of GMV processed in the second quarter and up from $5.8 billion (42%) in the prior-year quarter.
Shopify Capital advanced $153 million cash to merchants in the reported quarter, surging 65% compared with $93 million in the year-ago quarter. Since the launch of Shopify Capital, cumulative merchant cash advances have increased to $1.2 billion, out of which $166 million was outstanding as of Jun 30, 2020.
Shopify Shipping witnessed robust adoption in the second quarter. The offering is being leveraged by 49% of total eligible merchants across the United States and Canada, compared with 42% in the year-ago quarter. The company rolled out Shopify Shipping in Australia in partnership with Sendle — a courier services company.
Operating Details
Non-GAAP gross profit (adjusted for amortization of acquired intangibles) surged 84% year over year to $381.4 million. This can be attributed to the robust performance of Shopify Plus merchants and a higher mix of Merchant Solutions revenues. Non-GAAP gross margin contracted 4% from the year-ago quarter’s level to 53%.
Non-GAAP operating expenses surged 33.3% year over year to $267.7 million. Non-GAAP operating expenses, as a percentage of revenues, contracted to 37% from 56% in the year-ago period.
Shopify reported adjusted operating income of $113.7 million compared with operating income of $6.4 million in the year-ago quarter. The increase was driven by robust revenue growth.
Balance Sheet
As of Jun 30, 2020, Shopify ended the reported quarter with cash, cash equivalents and marketable securities balance of $4 billion compared with $2.36 billion as of Mar 31, 2020. The increase can be attributed to net proceeds worth $1.46 billion from the offering of Class A subordinate voting shares in the reported quarter.
Shopify generated net cash flow in operations of $80.2 million for six months ended Jun 30, 2020, compared with $47.4 million for six months ended Jun 30, 2019.
Shopify Refrains From Providing Guidance
Management believes that coronavirus crisis led ecommerce boom, and momentum in online retail spending will continue. However, Shopify refrained from providing any guidance for third quarter or 2020 due to COVID-19 induced uncertainties prevailing in the market and plausibility of an extended recession globally.
Long Term Outlook
So far, Shopify has not had any innovative initiatives. Shopify has however, put the power of e-Commerce back into the hands of the people.
Shopify believes that their investments will increase their revenue base, improve the retention of this global base and strengthen their ability to increase sales to their merchants.
Shopify plans to compete with Amazon as well as Square as an all in one merchant solution, offering payments, fulfilment, delivery, capital, branding and education to merchants.
Summary
Shopify delivered stellar first-quarter results driven by coronavirus crisis-induced e-commerce boom. The top line benefited from robust growth in the number of merchants. Increased buying of essentials due to COVID-19 induced lockdowns and social distancing norms aided growth. Moreover, the robust performance of Shopify Shipping, Shopify Payments and Shopify Capital are key catalysts. Furthermore, solid uptake of new merchant-friendly applications amid evolving retail environment bodes well. Additionally, partnerships with Walmart and Facebook are expected to expand merchant base. Initiatives aimed at international expansion are noteworthy. Notably, shares of Shopify have outperformed the industry on a year-to-date basis. However, higher investments in product development and fulfilment platform are likely to limit margin expansion in the near term.
Referred Sources:
Shopify Q2 2020 Results, Shopify 2019 10-K, Zacks.com and predictions made by the Author’s understanding of the company.
Disclosures:
This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.
