Shopify offers a cloud-based all-in-one commerce platform that's used by more than 175,000 small business merchants. On it's first day of trading in May, shares skyrocketed 51% (from $17 to $25.68). In less than five months the stock is up another 41% (to $36.21). The company's market capitalization (# of shares outstanding multiplied by stock price) is $3.0 billion dollars. In the latest twelve months Shopify lost $16.9 million dollars, on $144.8 million of revenue. What is driving the meteoric rise in the stock, and should you be a buyer or seller of Shopify stock ?
Recent Partnership Announcements with
The market for social commerce is a massive (FB has 1.5 billion monthly active, Instagram and Twitter are in the 300 million monthly active range). On September 16, Facebook said Shopify merchants will soon be able to sell their wares through a new Shop section on small business Facebook pages. When a user clicks on a product, merchants can either direct shoppers from Facebook to their online store or let them checkout directly on the Facebook site or mobile app. Shopify will handle payment processing and transaction tracking. On September 17, Amazon selected Shopify to be its preferred platform for helping small and midsize retailers build and manage online stores. Then on October 6, Shopify launched a partnership with Twitter to allow Shopify merchants to sell products directly on Twitter. Twitter’s “Buy Now” buttons will be available to U.S.-based Shopify merchants. The Canadian company has also inked a partnership with Pinterest that allow its merchants to sell products via buyable Pins.
Financial considerations
- Shopify is growing revenues quickly (average 89.7% quarterly year-over-year growth), however its SaaS (Software as a Service) revenue is growing slower than its Merchant Payment (MP) revenue
- Mix of revenue is approximately 60% SaaS and 40% MP
- According to its financial disclosures, MP revenue is much lower margin, than SaaS
- To be successful, SaaS companies count on very high user retention (e.g. 90% of new merchants are still customers at the end of the year)
- Shopify stated in its offering documents that merchant retention is 'consistent with what we would associate with early stage businesses'
- 8 out of 10 SMBs fail in the first 18 months (Forbes)
Shopify merchant perspective
About a month ago I decided to experiment with the Shopify platform to see how much time and effort it would really take to launch a business on the platform. Here is what I found:
- In general the platform is robust and there is a growing community of 3rd-party app developers (who have created about 1,000 apps)
- There is a steep learning curve to get up and running (I'm still not 100% ready to launch)
- When I needed phone support to customize my site, the experience was akin to
Apple ’s genius bar (no availability today) - The 20 minute support call I scheduled, didn’t resolve all my issues, so it was recommended that I hire a 3rd-party "expert"
- "Liquid”, the backbone of Shopify themes (and also used to load dynamic content on storefronts) is not a common programming language
- I tend to complete things that I start, so expect the store to be live soon
- The jury is out on whether I'll still be a Shopify merchant 12 months from now
Should you sell Shopify Stock?
In order to avoid any conflict of interest I don't trade individual stocks. I also don't give price targets. However I will tell you that I believe Shopify's stock is currently overvalued and here is why.
In an article I wrote last year I reported that enterprise value / revenue multiples ranged between 2.0x and 28.9x over a sample of 38 public SaaS companies. After having dug into Shopify's financial statements, my sense is that about 60% of Shopify's $144.8 million dollars of revenue is SaaS. In other words there is about $86.9 million in the latest twelve months.
Of course there is value in the low margin MP business, but if we stripped that out, today's $3 billion dollar valuation implies a 34.5x multiple to SaaS revenue. That's ridiculously high to me in light of the fact that merchant retention is 'consistent with what we would associate with early stage businesses'. My own experience on the platform also confirms this. Yes, Shopify's potential to become an integral part of the selling process on Facebook is exciting. Personally I'll wait until the company begins to 'show me the money' before recommending that anyone buy shares.
