- Shopify has multiplied by more than 30 in the last 5 years and already capitalizes more than 90,000 million dollars.
- Its sales are growing at an annualized rate of 50%.
- The company is creating a strong ecosystem and has significant competitive advantages.
- The valuation is high, but it is likely to meet expectations.
Since its IPO in 2015, Shopify has been a success story for its shareholders, going from $ 25 per share to more than $ 791 from its current price.
This is equivalent to multiplying by more than 30 times the original investment in the last 5 years, or what is the same, a profitability of almost 100% annualized.
It’s no wonder that many analysts wonder if it can become the next “Amazon” because of its excellent returns and insight from its founder, Tobias Lutke.
Currently, the stock market valuation of this Canadian company has exceeded 90,000 million dollars, making it already larger than competing companies such as Ebay (33,000 million dollars). Its profitability and historical graph have been the following:
After a small drop in 2015, Shopify stocks have not stopped climbing at incredibly high rates. Let’s see it here with numbers:
After seeing these figures. Are the Shopify stocks still attractive? Would it be nice to invest in Shopify stock today? Are their scalability and price attractive enough to invest and make money?
My opinion below.
Shopify is an ecommerce platform that offers different e-commerce services. The most important is the one that allows you to create “personalized online stores” without prior technical knowledge and without the need to worry about the different versions, plugins, servers, etc. All this is done in exchange for the payment of a periodic subscription that is valid from small to large companies.
This type of service is called SaaS (Software as a Services) and allows users to focus on what is most important, searching for customers and minimizing technical problems.
Regarding how to make money, Shopify currently has several subscription plans that include different features. In addition, in certain circumstances such as not using their payment service, Shopify will earn a small percentage also with each sale made in the Ecommerce of its customers. That is, it charges for what others sell.
Shopify not only seeks to focus on having the best platform for creating “online stores”, but also seeks to offer services to companies in other areas of the physical and digital world, such as payments with Shopify Payments (currently only available in the USA. ), through the creation of “Amazon” style fulfillment centers, or simply with the creation of APIs that allow third parties with Shopify stores to sell products from other platforms such as Wallmart.
Also recently came the news in which Shopify reached an agreement with Facebook to help small businesses sell online with the background technology of this Ecommerce.
In my opinion, the company’s strategy makes a lot of sense, since it will create added value to online stores that use this platform, and that do not have those of the competition.
Business competition
Currently Shopify has a unique and strategic product for its customers that no one has been able to replicate. Being the first has given them valuable time for the competition that wants to replicate them.
There are many platforms, but they do not offer the ease of use and the options of this young company, which gives added value to its users.
Among its biggest competitors are:
- Prestashop: Free and open source content manager for creating online stores. (see more here).
- Magento: Ecommerce platform purchased by Adobe in 2018 (see more information here).
- OpenCart: PHP-based online store management system. (more information).
- WooCommerce: E-commerce plugin for WordPress-based sites. It is open source and together with WordPress it is currently the most popular although it is changing with the arrival of Shopify. (See more information).
I haven’t added big tech companies like Microsoft (which is considering creating a similar platform and hosting clients on Azure), Facebook, Google, or Amazon. They should not be ignored as these large companies have proven capable of effective competition in all sectors.
Now let’s see if Shopify’s competitive advantages can help defend it from current and future competition.
Competitive advantages of Shopify
In my opinion, some competitive advantages of Shopify are:
- Switching cost: Once a store is implemented in Shopify, switching to another provider will be difficult. It would be necessary to migrate all the products, do an efficient SEO so as not to lose positioning in search engines like Google, etc.
- Scalability and TAM: The company is still “small” in the global pie of online commerce, with a market share of 5.90%. It also operates in a growing market where e-commerce does not even reach 15% of all retailers.
The following image shows the market share in 2019:
In the following graph the percentage of global retail trade that uses electronic commerce.
- It is a strategic company for its clients. Its users can surely save costs in other aspects, but the last thing they are going to eliminate is going to be the store itself.
- Shopify Ecosystem: Shopify is not a simple online store. You are having agreements to sell third party products and offer other services through APIs. The idea of the company, together with the logistics centers, Apps, payment systems, etc … is to create an ecosystem that generates a lot of added value for its customers.
- Data (Big data). Data is the oil of the 21st century, and Shopify is starting to have large amounts of it.
- Pricing power: Being a unique and strategic product, Shopify can increase its quota and surely few users change providers.
Why do I like the Shopify business model?
Regardless of the stock price valuation and its associated risks for a young and growing company, Shopify is a company that I really like as an investor.
It is scalable, and this means that it can grow significantly not only with its online stores, but with other lines of business associated with its Ecommerce. I also like that it is a platform and that they seek to create an ecosystem with it. This will retain more of your customers who will be willing to pay more for your services.
In addition, as it grows in number of clients, its fixed costs will be diluted in proportion to its sales, so it may be a very light company in assets in the future. And of course, being strategic and having pricing power is a plus for any investor looking for companies with unique products for their clients.
If, for example, Shopify increases its subscription by 10% next year, surely the vast majority of customers end up paying those prices without many alternatives, so in addition to being able to grow by attracting new online stores, it can also increase your sales by improving your ARPU (Average revenue per user).
Shopify figures. Fundamental analysis
Shopify sold $ 1.727 billion in the last four quarters (1Q-2019 to 1Q-2020). This “seems small” for a company that capitalizes 92,000 million dollars. However, its growth is 50% annualized and it is expected to continue more or less at that rate in the coming years.
To put a data from the last quarterly report, the stores created with its platform grew by 62% between March 13, 2020 and April 24, 2020. It is true that the current pandemic has influenced the acceleration of this trend towards “online”, but the background data has not changed and the trend is clear.
Shopify also reports the sales growth of its total customers (GMV – Gross Merchandise Volume). Between the dates discussed above, they rose 8%, with 45% of new users who had never bought before on one of their platforms.
Let’s see below the data for the last quarter:
- Total sales for the first quarter of 2020 were $ 470 million, an increase of 47% over the first quarter of 2019. You can see the trend in the graph:
- Subscription sales grew 34% to $ 187.6 million.
- Services grew 57% to 282.4 million dollars, mainly driven by higher turnover from its customers (GMV).
- GMV for the period was $ 17.4 billion, an increase of $ 5.5 billion or 46%.
And if we go now to its net profits or losses, it should be noted that currently Shopify, having great investment needs to finance its growth, has never presented a positive annual result. However, as its turnover grows, its growth expenses decrease with respect to sales as can be seen in the following graph, so it is to be expected that if everything continues like this in the coming years we will see the first positive results of this company.
Below is a graph with the quarterly sales of the company, in which the great growth of 50% annualized is observed.
Finally, it is worth highlighting the strong financial position of this great company, which is not financing its growth with debt, but with its own resources. It has 141.5 million debt, but 2,360.6 million dollars in cash or equivalents, which makes it have a net cash of 2,219.1 million dollars and moves away close capital increases in the coming years, always with the exception They want to buy another bigger company and do M&A.
This is the graph of the historical annual results of the company (as already mentioned, always with losses due to its reinvestment in growth):
Shopify risks
When we invest in the stock market or in another asset we will never be exempt from risk. Shopify is no different and there are risks.
The main risk to take into account when investing in this company is the difficulty of making a correct valuation. In my opinion we are talking about an excellent company that is beginning to be a benchmark in e-commerce, but for the investor who arrives new, if he pays a “premium” and buys the company for more than it is worth, he may really have a bad investment. Shopify, due to its “young age” and the need to estimate future growth for its valuation, it is difficult to put a “right” price on it.
Associate risks with the business are those of some new disruptive technology in which Shopify does not know how to adapt, that there is strong competition from big technology that endangers the growth of the company or that bad business decisions are made.
Another risk for the shareholder, although something normal in this type of company, is that too many new shares are issued that dilute our percentage in the total capital of the company.
These have been the outstanding shares of Shopify throughout its history. In the last year 7% more shares have been created to pay managers and employees.
Buy Shopify shares?
After seeing the operation of this company, I personally like the business idea and the implementation that its managers are doing. But as already mentioned before, you can invest in the best company in the world that if you do it at an excessively high price, it is very likely that you will lose money.
In the case of Shopify at first glance the numbers are very demanding and the stock price discounts a great growth in future years. In the event that growth finally does not occur, it is to be expected that the price will suffer the consequences.
As a point in its favor, that it is listed at demanding multiples does not mean that it is already a bad investment forever, but that the market has high expectations of it.
This already happened in other companies such as Netflix, Google or Amazon many years ago, which seemed quite expensive “at first glance” but they knew how to take advantage of their strengths to grow and generate a lot of money for their buyers.
From my point of view, here you have to ask yourself the probability of risks occurring and if Shopify can grow 40% or 50% in the next 5 or 6 years. If this is finally the case, I think it would be undervalued today.
For “getting wet” a little. I currently have no Shopify stock, but I wouldn’t feel uncomfortable having a small percentage of my portfolio invested in this company always looking long-term. The reason, despite being risky, is that I think expectations are likely to be met. In addition to growth, Shopify has optionality in other services and related businesses, as well as that I like the type of company.
If expectations are met, Shopify would have ratios similar to those of companies like Microsoft (9.5x EV / Sales) in 5 years. In addition, this e-commerce platform would surely have more growth in the following years than its peers, so it would continue to trade at more demanding multiples than the latter.
In my opinion, I believe that in the long term it is worth more than its demanding price of $ 92 billion today, however high it may seem, and I think it is more likely to make money in the long term than the opposite.
In any case, this is personal and if the day came that I wanted to buy Shopify shares at these prices, it would not have a great weight in my investment portfolio even if I could make a lot of money, it is not my greatest conviction in the long term, and more with all the growth expectations that it has and that are being paid for them.
These are your valuation multiples today:
Múltiplos de valoración de Shopify
| Ratio | Múltiplo |
|---|---|
| EV/ Ventas (Forward 12m) | 40,6x |
| EV/ Ventas (Trailing 12m) | 54.4x |
| Precio / Ventas (Forward 12m) | 41,6x |
| Precio / Ventas (Trailing 12m) | 55,6x |
| EV / EBITDA (Forward 12m) | 104,6x |
| Precio / Book Value | 31,1x |
| Precio / Tangible Book Value | 36,7x |
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Note: This is not a buy or sell recommendation, but a simple personal opinion.