Shopify (SHOP) is a leading global commerce company that allows anyone to set up an online store and sell their products. Shopify store owners can also sell in physical locations using Shopify POS. If a merchant happens to have both an online and physical presence, their inventory gets synced so that they can manage their store(s) from one account, on any device. To further elaborate, Shopify is a commerce platform that offers individual users the tools they need to launch their dream business and start selling to their customers, wherever they are. A merchant can build their store from the ground up or use the built-in templates on the Shopify platform to tailor their store according to their liking and business type.
What makes a company like Shopify stand out is that they offer exclusive features that no other competitor has. There competitive advantage comes from the notion that both beginners and pros can create and run their online stores without any coding. Furthermore, no software installations or hosting services are required. Merchants do not need to worry about servers or development costs that can be incurred with self-hosted platforms such as Magento.
Another key advantage to Shopify is that it is integrated to Pinterest, Facebook, TikTok and Twitter, hence allowing the merchant to promote their products on the most popular social media platforms. Shopify also has subscription services that are offered in a more affordable and crystalline fashion, as compared to one of its competitors, Amazon.
During the last decade, Shopify’s market share has been growing exponentially within the U.S. As of 2021, Shopify has a market share of approximately 23%, making it the second largest Ecommerce platform market share in the USA.
Shopify’s Revenue for the year ending at 2020 was approximately $2.9 Billion. An 86% increase from 2019. Online shoppers buying from Shopify created webstores have increased drastically over the past couple of years. There has been a 38% increase of online shoppers in 2019 as compared to 2018 and a 52% increase in 2020 as compared to 2019.
A Look at Shopify’s Sources of Revenue and Performance:
Shopify’s sources of revenue comes via subscriptions, transactions, referral fees, email marketing, hardware sales, commissions from selling themes or facilitating other website sales as well as advertising from its app marketplace.
Second, app developers can bid on keywords (“email notifications”, for instance) to promote their offerings. They then pay Shopify for every click. The amount charged is dependent on how competitive that keyword is.
With more and more retailers placing a heavier emphasis on Ecommerce offerings, many new competitors to Shopify have been entering the market. The likes of WooCommerce and Squarespace are already major competitors for the creation of e-commerce platforms. For fulfillment services, ) currently wears the crown. MercadoLibre (NASDAQ : MELI) has also gained a strong foothold in Latin America, making an entrance into that market really difficult. Big companies such as PayPal (NASDAQ: PYPL) and Google (NASDAQ: GOOGL) may also look to compete with Shopify down the line, further diluting the market. While these entrants would not spell the end for Shopify, it certainly would have a negative effect on its share price if these offerings were a success.
Since Shopify’s IPO in 2015, its average annual revenue growth has been more than 70%. It has now more than one million customers using its platform. Over time, with revenues increasing, it becomes harder to sustain this rate of growth. The company also is still not profitable, generating a net loss of $125 million in 2019.To continue its impressive growth rates, Shopify will have to spend to reach new markets and to provide a more efficient offering. It has now started the Shopify Fulfillment Network that will see the company storing inventory at designated warehouses, allowing merchants to reduce their shipping times.
A crucial point worth mentioning is that Shopify has never paid out any dividends i.e their retention ratio is 100%. This definitely has a positive impact in a sense that the money generated by the company is poured back into the company for further investments in the future. This strategy is really valuable if the company aims to grow even further.
The main focus of Shopify is small and medium-sized businesses. The Ecommerce platform allows these business owners to set up an Ecommerce store with little or no technical or coding knowledge needed. Everything is taken care of for these business owners, allowing them to focus on other parts of their business. However, when there is economic uncertainty, it is small and medium-sized businesses that tend to suffer the most. The global economic outlook now looks very hazy, and one thing is certain is that a lot of damage has been done. Many business owners have had to shut their operations as they can’t keep up with mounting costs, decreasing consumer spending, or debt obligations. Hence, this could lead to a negative impact on Shopify’s end as well.
Using a Comps Analysis, I used 5 companies that are in the same industry as Shopify Inc. After using certain multiples such as EV/Sales, EV/EBITDA, EV/EBIT and P/E, I arrived at an estimated fair value of $462.66 USD as compared to current market price of $1490.83 USD, and hence this implies that the stock is overvalued by the market by 222.23%. Therefore, resulting in a SELL recommendation.
Even though Shopify Inc. is emerging as a top key player in the Ecommerce industry and has potential to grow, however, the market may have been too optimistic with its expected future performance and hence overvalued the company. As much as Shopify has potential to expand its growth and become a pioneer in its industry, it is needless the say that the industry in which in operates in, the Ecommerce industry, is one of the competitive markets out there and hence it would be rational not to “over-estimate” its future performance.