Shopify Inc. (TSX:SHOP) (NYSE:SHOP) has a unique business model and expansion strategy and the stock’s recent pullback makes for a more attractive entry point
SmallCapPower | April 12, 2018: Shopify Inc. (TSX:SHOP) (NYSE:SHOP), headquartered in Ottawa, Canada, is a cloud-based, multi-channel commerce platform designed for small and medium-sized businesses across the globe. Shopify makes web- and mobile-based software and allows merchants to easily set up online storefronts. The Company’s platform provides merchants with a single view of their business and customers across all their sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces. Through the Shopify platform, merchants can manage their products and inventory, process orders and payments, ship orders, build customer relationships, leverage analytics and reporting, and access financing, all from one integrated back office. Founded in 2004, Shopify has 600,000 active stores on its platform.
Shopify has a unique business model and expansion strategy. The stock’s recent pullback makes for a more attractive entry point, even after a 70%+ run-up in its share price during the past year.
Investment Thesis
- Multi-channel front-end with single integrated back-end
- Expanding partner ecosystem
- Favourable growth story
Multi-channel front end with a single integrated back end
Shopify’s core proposition is its uniqueness in offering several front-end channels supported by a single integrated back-end. The Company’s software facilitates merchants in displaying, managing and selling their products over a dozen different sales channels, such as web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, such as Facebook and Pinterest, apps, buy buttons, and marketplaces, such as Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc. (NASDAQ:EBAY). In fact, the Shopify API has been created to support custom storefronts, which allow merchants to sell anywhere and in any language.
Furthermore, Shopify’s software provides a single integrated back-end, which is simple to use, permitting merchants to manage their business as well as customers across multiple sales channels. Whether it is managing products and inventory, processing orders and payments, shipping orders, building customer relationships or accessing financing, the Shopify dashboard provides a one-stop shop for facilitating these transactions.
Expanding partner ecosystem
Partners and affiliates, such as app developers, theme designers and other partners, such as digital and service professionals, marketers, photographers, have advanced around the Shopify platform, allowing for a more robust ecosystem. About 15,000 active partners have referred merchants to Shopify over the past year, leading to a continuously-growing, strong relationship network with the partners. This ecosystem has flourished partly because of the platform’s functionality, which is highly extensible and can be further expanded through application program interface (API), and partly because of ~2,300 applications available in the Shopify App Store. The partners help drive the growth of the merchant base, thereby increasing the growth of the ecosystem overall.
Favourable growth story
Shopify’s business has experienced rapid growth over the past five years. The Company’s revenue grew ~73% to $673.3 million in FY 2017 versus $389.3 million in FY 2016. Shopify has two revenue streams: Subscription Solutions and Merchant Solutions. In the year ended December 31, 2017, revenue from Subscription Solutions accounted for 46.0% of total revenues (vs. 48.4% in FY 2016) while the rest came from Merchant Solutions (54% in FY 2017 vs. 51.6% in FY 2016). Subscription Solutions revenues grew 64.4% to $310.0 million in FY 2017 from $188.6 million in FY 2016, whereas Merchant Solutions revenues increased 81% to $363.3 million in FY 2017 from $200.7 million in FY 2016.
Revenue from Subscription Solutions is generated through the sale of subscriptions to the Shopify platform as well as from the sale of themes, apps and the registration of domain names. Shopify offers varied plans to merchants depending on additional features and economic considerations. Their highest-end plan, Shopify Plus, starts at a rate that is several times that of the Shopify Advanced plan. Shopify Plus caters to merchants with higher-volume sales and offers additional functionality, scalability and support requirements, including a dedicated Merchant Success Manager. Shopify Plus merchants include Nestle, Red Bull, Rebecca Minkoff, and Kylie Cosmetics.
On the other hand, Merchant Solutions revenues come from payment processing fees from Shopify Payments. Shopify Payments is a fully-integrated payment processing service that allows merchants to accept and process payment cards online and offline. The other revenue streams are derived from transaction fees, Shopify Capital, Shopify Shipping, partner referral fees, and sales of point-of-sale hardware.
The number of merchants on Shopify platform has grown from ~377,500, as at December 31, 2016, to ~609,000, as at December 31, 2017. In FY 2017, the Shopify platform enabled Gross Merchandise Volume (GMV) of $26.3 billion, up 71.2% from the previous year.
Outlook and Valuation
Shopify’s business model employs multiple sales channels supported by a single integrated back end, which positions it as unique player in the industry. In terms of valuation, Shopify stock trades at a market capitalization of $14.11 billion with price-to-book ratio of 16.0x.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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