Get ready to hear many million and billion figures in this story, because there is much money at play.
In May 2020, Shopify became the largest Canadian public company when it surpassed the Royal Bank of Canada by raising its market capitalization to $120 Billion Dollars.
In simple words, market capitalization is the number of a company’s shares outstanding multiplied by the current price of a single share. In other words, the valuation of a public company.
Shopify stock is publicly traded in the exchange market since 2015. Last year, the share price went up from $322 in March to the north of $1000 Dollars per share. That’s a massive leap in a very short time, in a pandemic time and it leaves its valuation at $180 Billion, as of February 2021.
Yeah talking about Shopify these days is talking about eCommerce hype and hot stocks. They had the best second quarter of their life last year and those numbers are projected to rise.
E-Commerce, The New Normal
Consumers are shifting from brick and mortar stores to online shopping a lot faster now. The wild success of Shopify last year is a sign of this e-commerce spike. You might also have heard about this coronavirus pandemic, making online shopping pretty much a standard for many people in lockdowns.
Reports say that total online spending in May 2020 hit $82.5 Billion, growing 77% compared to the previous year. Analysts are suggesting that some online purchasing trends formed during the pandemic may be adopted permanently.
Shopify’s platform simplifies small and medium businesses to open an online store and do business on the web. It has surpassed 1 Million merchants on the platform and is not showing any signs of slowing down.
The company CFO, Amy Shapero, said on their financial report for Q2 last year:
”The strength of Shopify’s value proposition was on full display in our second quarter.’ We are committed to transferring the benefits of scale to our merchants, helping them sell more and sell more efficiently.”
In the second quarter of 2020, Shopify almost doubled revenue from the previous period, making $714 Million in revenue. That’s impressive, but not all of that figure is their profit. Some analysts think Shopify is not earning enough money to have the market valuation they currently have.
They still made a few million dollars in profits. Nevertheless, you may notice a big gap between that and the $126 Billions of their market capitalization we mentioned earlier. That’s mainly due to investor hype in the stock market, pretty much betting on Shopify to be the next big thing in e-Commerce. But this has some investors wondering if the company can be over valued and inflating a bubble.
Is it Overvalued?
No matter how we look at it, in the end, it has a lot to do with the investors interpretation on the market.
But lets check out some indicators and try to understand what is up with the hype. First, lets understand what does a bubble in the market means.
”A bubble is an economic cycle characterized by the rapid escalation of market value, followed by a quick decrease in value, a contraction that leads to the ”Crash” or ‘Bubble Burst”Investopedia
So, back to Shopify, here’s how they make money. Their business model is based on two main revenue streams. First, they have a subscription for merchants, with plans ranging from $29 to $299 a month. This revenue channel is growing at 28% year on year (YOY), as of the second quarter of 2020.
Second, Merchant Solutions is a global payment processor that facilitates services like automated recurring billing and mobile payments. They get a commission from these solutions, and it has been outgrowing the revenue from the subscriptions.
In addition, they keep extending their services and features. They are now getting more into fulfillment and shipping, offering solutions for merchants all across their sales process. In late 2019, they acquired 6 River Systems for around $450 Million; a startup focused on warehouse automation using robots and cloud-based software, a massive enhancement for their fulfillment network.
The Shopify app store is a digital marketplace where developers create apps for merchants to enhance their experience and customize their store. They even loan money to businesses now with Shopify Capital.
With all these, they are close to making billions in revenue, but they are not there yet. Still, taking a quick look at the balance sheet from their financial report in Q2 of 2020, you can see the valuation of its current assets at $4.3 Billion. In contrast, their liabilities were $320 Million. Without any more technicalities, this at least means that Shopify has cash for days.
They can respond to their financial obligations and still be in a good position, with a few a few billion dollars to spare. This of course doesn’t answer the question of whether the company is overvalued or not, but maybe it is an indicator that the company will not go bankrupt anytime soon. Analysts suggest that this high liquidity can be valued a lot in the current market, given the economic instability caused by the pandemic.
Shopify started as a solution to help small and medium businesses sell online. The company CEO, Tobias Lutke, has talked about how the company began in 2006 as he and some friends had the hobby of snowboarding in Canada and wanted to sell snowboards.
The company was born as the solution to the over-complicated process they found to sell the snowboards online. Lutke said it was evident that no one was thinking about new businesses going online at the time. So they created Shopify. It went from a small startup to being publicly traded in less than ten years. Yet the last year have been critical and can be setting the pace for the future.
Today, it still hosts small and medium businesses, as they are at the core of their mission. Yet, they also power stores for companies like Tesla, Nestle, and Budweiser.
The total value of orders managed on Shopify for Q2 of last year was $30.1 Billion, growing 119% from the previous year, and it already surpassed eBay’s. Having caught up with eBay in metrics like this makes Shopify the next real contender for Amazon. Right? Well yes and no.
Hunting for Amazon
Shopify and Amazon are e-commerce businesses as they incur in online sales, but comparing them may not be accurate. Also, the gap between them is still large. For reference, while the total value of orders managed on Shopify has been $30 Billion in 2020, Amazon’s was around $335 Billion in 2019.
There are many other players interested in their share of this e-commerce bonanza ruled by Amazon. Walmart, another retail giant, has been expanding its online operation and is joining forces with Shopify now. In June 2020, they announced a partnership that will bring around 1200 Shopify sellers to the Walmart marketplace. It may not sound a lot, but it can be just the beginning of this relationship. The Vice President of Walmart’s marketplace, Jeff Clementz, stated at that time:
”Shopify powers a dynamic portfolio of third-party sellers who are interested in growing their business. This integration will allow approved Shopify sellers to seamlessly list their items on Walmart.com, which gives Walmart customers access to a broader assortments.”Jeff Clementz
For some context, according to TechCrunch, back in 2018, 140 million customers shopped in Walmart stores weekly, and 90% of Americans lived within 10 miles of one of its locations. This geographical presence gives obvious advantages for fulfillment operations. Two-day shipping and seamless returns are already part of Walmart’s offer for millions of products. These moves look like direct attacks on Amazon, and only time will tell if they will scale and rival the Seattle behemoth.
Yet another company looking for its share of the pie is BigCommerce. In early August 2020, this company entered the stock market with an initial offering priced at $24 Dollars per share. The road to catching up may be long for them, but they are already in the fight, and investors interest in e-commerce is not slowing down anytime soon.