Summary
- Shopify IPO allows investors to gain a return from the strong growth of e-commerce.
- Shopify has many untapped markets left.
- Shopify shares offer high potential returns if management can continue strong growth and eventually turn a profit.
After reviewing Shopify (Pending:SHOP) FORM F-1 extensively, I have summarized all the main points and reviewed the company, risks, competitors, share price and the current state of the e-commerce industry in this article. As a previous user myself of Shopify when launching my e-commerce business I can speak to its solid platform, ease of use and outstanding customer support.
Overview
Shopify is Canada's first internet startup since the dot com crash to reach a billion dollar valuation and one of only 39 firms created in the US and Canada since 2003 to reach a billion dollar valuation. Shopify is a cloud based commerce platform that allows brands to run their business across all sales channels from their websites to brick and mortar stores. Shopify's platform allows brands to manage their products and inventory and process payments and orders. Shopify allows brands to handle spikes and dips in sales from their websites with ease and is used by over 160,000 stores in 150 countries, by brands from Tesla, Google, Wikipedia, WWF to mom and pop stores.
Business
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Fig 2: Shopify growth in merchants and merchant sales
Shopify has on average almost doubled its merchant base every year for the past 3 years and more than doubled merchant revenue every single year for the past 3 years. Shopify has stated that it has identified over 46 million merchants worldwide with less than 500 employees which it sees as its target market. This leaves significant growth potential ahead for Shopify from its current 160,000 customers, even if it were to only capture a small percentage of this overall market.
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Fig 3: Shopify financial statement
Fig 3: Shopify financial statement
Shopify breaks down its revenue into Subscription services and Merchant solutions which I describe in more detail below. Total revenues from Subscription services and merchant solutions have grown by over 100% every year for the past 3 years. That trend looks set to continue for 2015 when looking at the 3 months ended March 31 revenue for 2014 and 2015 which show slightly under 100% growth.
- Subscription Services: Includes subscription fees, payments from sales of website themes, apps, and domain names.
- Merchant Solutions: Includes fees from Shopify Payments (currently only available in Canada, USA, and UK), referral fees, and POS hardware sales. Shopify notes in its filing that Shopify payments has been decreasing its margin however it expects to see little downside in margin going forward, with most of the decrease having already happened.
Merchant solutions revenue growth has been outpacing overall revenue growth at Shopify and it looks like that is set to continue when looking at the 3 months ended March 31, 2015 compared to a year ago. It is also promising to see that during the same timeframe Shopify has significantly reduced losses compared to a year ago.
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Fig 4: Shopify revenue by region
Fig 4: Shopify revenue by region
Shopify derives 84% of its revenues from Canada, USA and UK. This is a weakness but also an opportunity for the company. Canada, USA and UK make up only 36% percent of e-commerce sales in the top 10 e-commerce markets and there lies significant opportunity ahead for Shopify if they can tap into the size and growth of other markets.
Shopify is in a unique position in that it can monetize and capture all e-commerce growth without being focused on any particular segment and the risks that would bring. Shopify has stated no customer represented 1% or more of its revenues in 2012, 2013 and 2014. Shopify has strong customer loyalty and works with its 160,000+ stores to build their brands through free tools, guides, video content, books, and a blog. By ensuring the success of its customers it also ensures its own success by creating customers who will upgrade to more expensive plans and process many more payments and orders. Shopify's employees own 20% of the company and are encouraged to act like owners and help build long term value for the company.
