Shopify (Ticker: SHOP) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Shopify Inc. (NYSE Ticker: SHOP) is a Canadien-based multinational e-commerce company that offers merchants a platform for managing sales across multiple channels (including both online and in-person points of sale). In addition to processing payments, Shopify creates digital systems for managing inventory, shipping products, and customer relations and helps merchants leverage data analytics. Through acquisitions and strategic partnerships, Shopify has grown from a payment processing service into what it is today. As of 2021, Shopify is the largest publicly traded Canadian company by market capitalization.
Quantitative Analysis
At the time of this writing (7/03/2021), SHOP is trading at $1,464.75 with a 52 week range of $839.40 - $1,552.23 and a market cap of $182.13B. In Q1 of 2021, Shopify’s revenue grew to $988.6 million, a 110% year-over-year improvement. This improvement was driven by growth across multiple sectors within Shopify’s business model, including subscription solutions (+71% YoY), merchant solutions (+137% YoY), and monthly recurring revenue (+62% YoY). The return of equity (ROE: Net Income / Total Equity *100) of Shopify is 24.43%, the price to earnings (P/E) ratio is 114.54, and the Net Margin (Net Income / Revenue) is 46.67%. It seems like all of the financial tech industry has shot up since the COVID crash in March of 2020 and Shopify is no different. Shopify’s stock price is up over 450% in the past year and a quarter! Be sure to check out our breakdowns of two other major players in the financial tech industry, PayPal and Square. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view SHOP’s 2021 Q1 earnings here and their 2020 Annual Report here.
Qualitative Analysis
Shopify started as a solution to make e-commerce more accessible for small businesses. After solidifying their position in the e-commerce space, Shopify expanded to point-of-sale (POS) solutions for physical retailers. Shopify’s mission is to provide services and products that allow sellers to start, run, and grow their businesses across both physical and digital channels. Their commitment to small businesses is clearly demonstrated by their dropping fees to $0 for companies with revenues less than $1 million. In addition to payment processing, Shopify provides merchant services like discounted shipping and financing to help commerce for businesses more accessible. Currently, Shopify has around 1.7 million merchants spread across more than 150 countries worldwide. Despite increasing competition in the fintech space, Shopify has outperformed expectations. Shopify is also gaining traction with Shopify Plus, a customizable commerce platform designed for enterprise clients, as companies such as General Electric, Nestle, and PepsiCo have started using the platform. Shopify Plus now has over 10,000 businesses and can seemingly grow as companies already using their platform can transition into Shopify Plus as they scale up.
Bullish Thesis
Here are three points to support the bullish thesis:
Using Tech to Reduce Friction Points: Some of the most transforming companies of the 21st century have used tech to reduce friction points on time-tested products and services. For example, Uber made cab hailing easy - just a few clicks and your ride is set; no more looking for a cab service, calling a or waving down a driver, and having cash on hand to pay. Shopify provides tech solutions that reduce friction across a number of common business-related problems: payment solutions, inventory management, product shipping, and customer relations across both physical and digital space. By providing these products and services, Shopify allows small business owners to focus on building their own products and providing their own services. In the digital age, providing these solutions to business owners with great ideas but lacking in technical know-how is huge! If Shopify can continue to reduce friction points in these areas, they will continue to grow.
Product/Services Development: Shopify has proven its commitment to improving and expanding their products and services. They do this through their own internal development and through strategic partnerships and acquisitions (and sometimes both - in 2016 they acquired a mobile app development company called Tiny Hearts and turned their building into a Shopify research and development center). In 2019, Shopify acquired Handshake, a company that facilitates business-to-business wholesaling. Also in 2019, Shopify announced its integration into Snapchat, allowing merchants the ability to manage advertising via Snapchat Stories (they have similar advertising-related partnerships with Google and Facebook). All of these moves should signal to potential investors that Shopify is committed to improving their products and expanding into as many markets as possible.If they can continue to do this, they will remain a dominating force in the fintech space and a strong performer in your portfolio.
Integrating Sticky Solutions: Creating products and services that integrate deeply into a business ensures mid- to long-term stability for Shopify, as their products/services become embedded and difficult to replace (i.e., they’re “sticky”). Shopify not only provides a solution for payment processing - which could be replaced by other relatively easy-to-use products like PayPal or Square Inc. - but they also provide solutions for inventory management, shipping, advertising, and customer relations. This all-in-one solution sets Shopify apart from many of its competitors. Suppose that you run a business and your payment processing, inventory, shipping, etc. are all done using Shopify. Now suppose that you want to switch away from Shopify (maybe Elon tweets something that he doesn’t like about the company). Are you willing to switch from one company to several companies to do so? How long will it take for you and your employees to implement the new system(s)? How long will it take to optimize the new system(s)? What is the potential profit loss in the time it takes to implement, learn, and optimize the new systems? Do the several new systems integrate seamlessly with one another? Do the new systems produce data that can be leveraged for strategic decision making? These are all questions that would need to be asked if a business owner wanted to ditch Shopify.
Bearish Thesis
Here are three points to support the bearish thesis:
Slowing Growth: Like mentioned in our breakdown of Square, the year 2020 had incredible growth of small businesses starting with 4.3 million business applications filed which was 24% higher than 2019 and 51% higher than the average from 2010 - 2019. With Shopify’s main business coming from new businesses opening and using their platform, Shopify is expecting slowed growth in 2021. With the rapid growth of 2020 it would be extremely difficult to keep that pace up, but now Shopify will need to try to get businesses to switch platforms in order to keep pace with 2020 or capture more market share than it currently has. The slowed growth may mean a slowed stock price increase as well.
Competition: We’ve used this argument for both Squareand PayPal,but the competition may affect Shopify more so than the other two big players in the financial technology industry. Shopify currently has just under 11% of the ecommerce market share, which may point to increased growth opportunities but in the financial tech industry, business do not transfer from company to company very frequently. With Shopify only being a payment processing service for businesses, it will need to continually gain market share through new businesses and it will need to rely on businesses staying in business. With just the platform to help businesses receive payment, Shopify will need to capture more of that market share in order to compete with companies with multiple ways to generate revenue.
Source: Statista
Lack of Diversification: As mentioned in the point above, Shopify currently only has a platform for managing sales across multiple channels (including both online and in-person points of sale) and a digital system for managing inventory, shipping products, and customer relations and helps merchants leverage data analytics. Shopify’s main competition is PayPal and Square both have peer to peer money transfer apps (Venmo and CashApp), PayPal is an established business, and Square now has investments in the Bitcoin space and a recent acquisition of Tidal the music streaming service. In order to grow Shopify will need to diversify or find a way to ensure the Shopify platform is much better for users so new business owners will see Shopify as the best option for managing sales.
Learn more about Shopify Inc. here. Stay up to date on Green Candle by subscribing to our newsletter and following us on Twitter and Instagram!
Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.