Shopify’s New Margin Profile

Posted on May 15, 2023June 30, 2026 by io-fund

Shopify was once a market darling yet has been in the penalty box over its margins for some time. Independent of the market’s very positive reaction to the news, it’s a good idea to revisit Shopify and determine what the new gross margin may look like and also what risks remain. Below is a link to the most recent webinar that details why we are in wait-and-see-mode with Shopify as the technicals are not providing the setup we are looking for right now. However, should we get the right setup, we want to be ready with a clear fundamental outline of what to watch for.

Shopify Over the Past Year:

Shopify greatly benefited from the ecommerce boom during Covid, with revenue rates accelerating to 90%+ growth rates and GAAP operating margins of 12%. Like many management teams, starting in late 2021-2023, Shopify came under pressure for investing in growth. The market was particularly concerned with the company’s investments in distribution, such as the Shopify Fulfillment Network with costs of $1B and the acquisition of Deliverr for $2B.

This acquisition came at a bad time as Deliverr increased stock-based compensation (SBC) when the market was growing concerned with SBC across the board. Stock Based Compensation increased from $151 million in H1 2021 to $257 million in H1 2022. The company stated that SBC plus payroll taxes is at $750 million for the full year. This number was later revised to $575 million for the year.

Shopify Fulfillment Network

In order for Shopify to continue to scale and take on Amazon, Shopify pursued building fulfillment centers to provide two-day shipping to 90% of the US population. This expansion front-loaded costs with management stating they do not expect to recognize the benefits of scale until ~2024.

Furthermore, management explained on previous earnings calls that they expect 100% of their gross profit in 2022 to be reinvested into growth initiatives over the next few years, signaling that OpEx and CapEx will equal gross profit, which will limit earnings growth. Shopify also had stated that it expects to hire more engineers in 2022 compared to 2021, “despite an exceptionally competitive market for top talent.” These expectations for a rise in expenses in the near term, during an inflationary environment caused a landslide in Shopify’s stock price.

Moreover, management left analysts in the dark when questioned about the ROI and payback of its Shopify Fulfillment network (SFN) investments. Specifically, CFO Amy Shapiro responded to an analyst question about SFN payback by stating that “we're not going to get into the details of how we view payback ROI [for SFN]. But what we can assure you is, we've always been strong allocators of capital to the right opportunities to grow the various parts of the business at the right time, and this is no different.”

The market does not like uncertainty and the lack of commentary about the cadence of ROI on its SFN investments also pressured its valuation.

Over time, it became apparent that Deliverr was dilutive to gross margin as management stated the 46% gross margin in Q4 was due to “Shopify Payments and Deliverr.”

Reduction in Capex Costs and 20% Headcount Cuts

Shopify announced plans to layoff 20% of its workforce following a previous announcement the company was reducing 10% of its workforce. This is roughly 3,000 employees.

The company is also selling its logistics business to Flexport for 13% equity. Flexport was last valued at $8 billion so the equity is worth about $1 billion. Shopify acquired 6 River Systems for $450 million and Deliverr for $2 billion, which are part of the equity exchange.

According to Shopify’s management team, the goal for SFN was to spend a total of $1 billion by 2024. Through 2021, the company had spent $117 million. In Q2 of 2022, an analyst asked the Shopify management team if they had plans to exceed the $1 billion investment in Shopify Fulfillment Network and the CFO said there are no plans to expand that amount at this time.

As of Q3, the company had $4.9 billion in cash.

Merchant Solutions Versus Subscription Solutions

Merchant Solutions is a lower margin business at 37.2% gross margin and is 75% of the company’s revenue and is also growing at a higher rate than Subscription Solutions.

In the current quarter, Merchant Solutions was at 31% growth for $1.1B in revenue compared to Subscription Solutions at 11% growth for $382M in revenue. Previously, Shopify had a gross margin in the 55% range. The total gross margin today is 47.5%. The Cost of Goods Sold is 53% of revenue compared to COGS previously of <45% or revenue. Notably, COGS inched upward to the 49% range prior to the Deliverr acquisition closing. This is likely due to Shopify Payments.

The Deliverr acquisition was announced in May of 2022 and was completed in July of 2022. Meanwhile, Shopify reported softer gross margins prior to this date.

My understanding is that Stripe fees and credit card fees weigh on the Shopify Payments business. Per the company: “And within our Shopify Payments business, we continued to see gross margin pressure due to the greater mix of Plus and higher mix of credit cards versus debit cards compared to Q1 last year.”

The company also stated the following about the gross margin in the upcoming quarter: “Q2 gross margin percentage is expected to be similar to our Q1 gross margin percentage with the expected benefit from the pricing changes to be offset by the pending sale of our logistics business and the continued growth of Shopify Payments, which is a lower-margin business.”

Within Merchant Solutions, the lower margin Shopify Payments is a major contributor to the company’s growth: “Q1 Merchant Solutions revenue was $1.1 billion, increasing 31% year-over-year or 33% on a constant currency basis, driven by the increase in GMV, continued penetration of Shopify Payments and the contribution from Deliverr. $27.5 billion of GMV was processed by Shopify Payments in the first quarter, 25% higher than in the first quarter of 2022. The penetration rate of Shopify Payments as a percentage of GMV was 56% for the quarter versus 51% in Q1 of the prior year.”

More on Q1 Earnings Results

Revenue of $1.51B beat estimates by 5% and EPS of $0.01 beat estimates of ($0.04). The company doesn’t offer guidance yet said they expect Q2 to “grow at a similar rate” as Q1 on revenue growth and gross margin to also be similar. That implies revenue growth of 26% in Q2 and gross margin of 48%.

The company expects operating expense dollars, when excluding one-time items related to the planned sales of their logistics business and severance, to decease by mid-single digit percentage compared to operating expenses in the first quarter of 2023.

Notably, analyst consensus is that Shopify exits the year with revenue growth of 16% but with the expectation that Shopify will be profitable on an adjusted basis into the foreseeable future. The last few quarters, adjusted EPS has been negative.

In addition to the news that Shopify is spinning off the Shopify Fulfillment Network and reducing headcount by 20%, the company also reported an acceleration in key metrics.

Primarily, gross merchandise volume (GMV) was up 15% this quarter to $49.6 billion, or 18% on a constant currency basis. This compares to 16% on a CC basis in the year ago quarter.

Gross payments volume also grew to 56% of GMV at $27.58 billion, up from 51% of GMV in the year ago quarter.

The attach rate, which is defined as revenue divided by GMV, was at 3.04% compared to 2.79% in the year ago quarter. This translates to merchants buying more products and solutions from Shopify and was the highest attach rate the company has ever reported.

Will Margins Continue to Improve After Logistics is Sold Off?

Margins this quarter were weaker across the board:

Gross Margin was 48% down from 53% in the year ago quarter
GAAP operating margin of (13%) was down from (8%) in the year ago quarter
Adjusted operating margin of (2%) compares to +3% in the year ago quarter
Adjusted net margin of 1% compares to 2% in the year ago quarter

In the chart above, Shopify’s GAAP operating margins reached (-15%) in Q2 of last year and bottomed out at (-25%) in Q3 before rebounding to (-11%) in Q422 and dipped back down to (-13%) in Q123.

Based on management’s Q2 sales, gross margin and operating expense dollars commentary, we calculated how this could potentially impact GAAP operating Margins next quarter. We came out with a range of between (-10%) to (-5%). The upper end of the range will be reached if Shopify is able to attain its sales target. If so, GAAP operating margins, while still negative, will improve dramatically compared to Q123 if (-5%) is reported.

And if they do, the next question will be if Shopify can reach positive GAAP operating margins in the 2nd half of 2023? To provide some context, the last time these margins were positive was in Q4 of 2021 when it reached +1%.

Despite efforts to reduce operating expense dollars, much of the margin improvement will still be dependent on future sales growth, which is hard to predict given the current macro environment. It will also be dependent on product mix, per the analysis above.

For 2023, the blue sky scenario is if Shopify can hit the upper range of the implied GAAP Operating Margin in Q2 of 2023 and indicate it’s moving closer to positive margins by sometime in 2023/early 2024.

Given the price action post the Q1 earnings release, it appears the potential significant improvement in GAAP operating margins from Q1 to Q2, coupled with the divesture and short covering has likely been reflected in the stock price for the time being.

Cash Flow:

The company had operating cash flow of $100M in the most recent quarter for a margin of 6.6% up from (2.1%) in the year ago quarter.
Free cash flow margin was 5.7% up from (3.4%) in the year ago quarter.
The company has $4.9B in cash with $914M in debt.

Valuation:

Shopify has certainly traded at a higher valuation but not for about a year. The market will need to decide if 2022 valuations are the new norm or if the market can march higher based on historical valuations.

Conclusion:

As stated, the optimism that surrounds the Logistics business being sold off has not addressed the fact that Shopify Payments is a lead contributor to growth and continues to weigh on the gross margin. We will use a blend of fundamentals and technicals to help with our timing as this company is sensitive to the economy due to exposure to consumer spending and small to medium sized business (SMBs).

Please reference the last Advanced webinar here for our buy plan and technical setup.

Why We Closed Shopify

Posted on October 27, 2022June 30, 2026 by io-fund

Despite the market liking the report, we closed the position based on the following:

Gross Margin slipped from 51% last quarter to 48.30% this quarter. On the call, they discussed the following reasons: “Lower margin merchant solutions, lower margin shop pay, impact of deliverr and increased cloud infra” (This is a paraphrase as the transcript is not avail yet). Merchant Solutions gross margin is 37.2%.
In the past, Shopify had a 71% GM in 2020 and a 61% GM in 2021.
Operating margin from (15%) last quarter to (25%) this quarter yet could be more persistent if SHOP will see a weaker GM.
The net margin of (11%) is actually (21%) if you remove the investments Affirm, Global-E and Silvergate. The (21%) gives a better idea of business operations. In this case, I removed the $173M gain in equity listed.
Free cash flow of ($228M) this quarter up from ($136M) last quarter. For our purposes, this is a red flag in the report given the market’s sensitivity to a rising rate environment. We’ve detailed this a few times especially with cloud that worsening FCF will cause us to redirect.
Shopify did improve this SBC outlook from $750M to now $575M for the year. This may reflect the new comp program and more employees electing cash. However, it's a notable variable into the foreseeable future (if stock does well, dilution will rise if employees go with more stock, which is a likely outcome).
Stock based compensation for the quarter was $149.9 compared to SBC of $139M last quarter. This implies $100M +/- on SBC next quarter given the FY guide.

There was a nice revenue beat and nice EPS beat. Key metrics are mixed with the lower margin Merchant Solutions driving the growth at 18% last quarter and 26% this quarter. However, the predominant key metric Gross Merchandise Volume ticked down from last quarter at $46.9 billion to $46.2 billion this quarter. Monthly Recurring Revenue dropped from 13% to 8% this quarter. It was stated on the call that SMBs were (3%) on MRR. I don’t have the transcript but that is what was said by an analyst.

Something to watch for is if Deliverr is dilutive to the company beyond gross margin. I don’t have enough visibility and management did state some of the GAAP OpEx was affected by litigation costs of $97M and severance of $30M (again, don’t have the transcript) yet this is something to watch out for if it was dilutive to GM.

These decisions are hard but it’s our investing discipline to not remain in stocks with worsening margins and worsening free cash flow. 2023 is remarkably uncertain in many regards and we feel it will be easier to navigate the macro uncertainty if the underlying business supports both revenue and bottom-line growth.

Sea Limited Q1 Earnings Update

Posted on June 2, 2021June 30, 2026 by io-fund

Sea Limited showed tremendous performance in each of their three business segments in their Q1 earnings report. The dominant position Sea Limited has in three separate and growing businesses is what makes the company so strong. The biggest risk is that one or more of their three businesses will fall off its current pace and lag growing competition. In the company’s Q1 report, Sea Limited demonstrated that they are a company executing better than ever in each of their three business segments.

Shopee

In Q1, Sea Limited announced e-commerce revenue of $922.3M, representing 250% YoY GAAP revenue growth. Gross orders totaled 1.1 billion, a 153% increase YoY. Gross Merchandise Value (GMV) was $12.6B in the quarter, representing 103% YoY growth. Adjusted EBITDA declined to -$413M from -$264M in Q1 ’20 due to increased investments in S&M and R&D. However, Adjusted EBITDA loss per order decreased by 38% YoY to $0.38 compared to $0.61 in Q1 ’20. This indicates that Sea Limited continues to outgrow its costs in terms of gross order volume.

In Southeast Asia, Taiwan, and Indonesia, Shopee ranked #1 in the Shopping category by average MAUs and total time spent in app on Android for Q1, according to App Annie. These rankings are further indication that the strategy management has taken is to prioritize growth in favor of short-term profits – and this is paying off as the company continues to extend its leadership position in various regions.

Sea Limited has expanded its platform into parts of Latin America, but management did not separate out financials in the region. With that said, the company has previously discussed its plans to invest aggressively to building out the infrastructure necessary to compete with MercadoLibre.

Garena

Sea Limited announced digital entertainment (Garena) revenue of $781M, representing 111% YoY GAAP revenue growth. Bookings of $1.1B grew 117% YoY, while Quarterly Active Users increased 61% YoY to 649M. Quarterly paying users grew by 124% YoY to 80M and represented 12% of QAUs for the Q1 compared to 9% for Q1 2020.

The company’s blockbuster game, Free Fire, was the highest grossing mobile game in Latin America, Southeast Asia, and India for Q1. Moreover, Free Fire overtook PUBG Mobile and Call of Duty Mobile as the top grossing battle royale style game in the United States. App data from Sensor Tower shows that Free Fire has continued its momentum into Q2, as it was the 3rd most downloaded mobile app game in the world in April.

Source: Sensor Tower

SeaMoney

Sea Limited’s digital financial services segment saw $51.3M of revenue in Q1, representing 396% YoY growth. This segment is still just 3% of the company’s total revenue as we are in the very early innings of the shift to FinTech in Southeast Asia. Nevertheless, we are seeing promising growth metrics from SeaMoney, showing that they are primed to be a top FinTech player in the region.

Mobile wallet services recorded a total payment volume of $3.4B, which more than tripled compared to the $1.1B a year ago. Quarterly paying users surpassed 26.1M in the quarter.

In December 2020, Sea Limited was awarded a digital banking license in Singapore. A report by Financial Times shows that almost 50% of Southeast Asian adults are unbanked an additional 25% are underbanked.

This underscores the tremendous long-term opportunity Sea Limited is trying to capture in FinTech. There is a long runway for growth in digital banking as well as digital payments in Southeast Asia, and we are seeing Sea Limited begin to position themselves for future growth. Over the long-term, SeaMoney has the potential to be a legitimate source of revenue and capture a bigger piece of the revenue pie in addition to Shopee and Garena.

Q1 Earnings Results

Sea Limited announced Q1 results last month, growing GAAP revenue 147% YoY to $1.8B (US $). Total gross profit increased 212% YoY to $645M, while total adjusted EBITDA advanced to positive $88.1M compared to -$70M in the Q1 2020.

The Q1 adjusted EBITDA number missed the consensus estimate of $173M, but the company has been very transparent about its strategy to aggressively reinvest profits back into the business to focus on top line growth. In total, sales & marketing expenses increased 120% in the quarter while research & development expenses increased 118%. Management appears to be taking the right approach to stimulating growth and engagement in each segment of the business, as evidenced by some of the growth metrics discussed below.

Sea Limited has three distinct business segments in e-commerce, digital entertainment, and digital financial services. All three business segments executed tremendously in Q1, with each segment exceeding a triple digit growth rate. Below is the revenue breakdown in Q1 2021 versus the breakdown in Q1 2020.

Valuation

Sea Limited currently trades at a 12.4x EV/NTM revenue multiple, down from its peak valuation of around 27x last February. Below, we compare this valuation to other international e-commerce stocks MercadoLibre and Jumia. Notably, Sea Limited has higher forward growth projections for 2021 than MercadoLibre or Jumia. The table below shows a more detailed comparison of Sea Limited to MercadoLibre and Jumia. We also included Ozon Group and Coupang, two less expensive e-commerce leaders, for comparison.

Conclusion

Sea Limited did not give guidance for Q2 or FY21, but consensus estimates are calling for 89% YoY revenue growth for the full year. All three of Sea Limited’s business segments are performing better than ever, and the company has a long runway for growth as Southeast Asia continues to become more digitalized. Sea Limited has positioned itself as the dominant e-commerce company in the region with the success of Shopee, the top shopping platform in SE Asia. With Garena, Sea Limited has the most dominant gaming company in the region with no signs of slowing growth. SeaMoney, the company’s third segment, is ideally positioned to be one of the leading FinTech players in the region and will continue to benefit from increased digitalization.

Shopify Premium Analysis for 2021

Posted on December 17, 2020June 30, 2026 by io-fund

2536843c-2d08-4b42-8fa9-d362f83f8268_Shopify-Premium-Analysis-for-2021.pdf

Shopify Premium Analysis for 2021

Introduction:

As the market attempts to sort the companies that have temporary covid tailwinds from the more permanent and long-lasting growth, we want to separate Shopify from the pack. You can view our October 2019 analysis here where we discussed the strength of the company’s product-market fit and the catalyst of the Fulfillment Center.

One major update from the last report is that Shopify overtook eBay as the largest online retailer in the United States. When our last report was written, Shopify was the third largest retailer and a sizable portion of our analysis focused on eBay as the one to overtake.

I think we will see Shopify significantly close the gap due to Shopify's global opportunity. Shopify is more localized by allowing the merchant to have a localized domain rather than weaken under one domain as detailed in the October 2019 analysis.

Amazon is customer-centric which sacrifices the merchant-side of the equation. We covered this in 2019 when we stated:

Shopify counts over 800,000 merchants as customers compared to Amazon’s 5 million marketplace sellers. Shopify charges the sellers 2-3% compared to 26.5%. Amazon is also predominantly a United States presence with about 3⁄4 of sales occurring domestically. Shopify does not break out these numbers but it is widely understood to have a global strategy.

As mentioned previously, an important distinction between Shopify and Amazon is that Shopify places the importance on the merchant while Amazon places the importance on the retail customer. While Amazon builds out 1-day shipping, Shopify is building out tools for platforms and tools for merchants.

Amazon’s main value proposition is the convenience, which is why we will likely see Shopify attack this at various angles over the next few years (starting with the Fulfillment Network). Amazon’s e-commerce moat is about the same as Wal-mart’s retail moat; they are behemoths but these behemoths can be disrupted. Amazon took market share from Wal-Mart, and nearly two decades later, we think Shopify is a serious contender to Amazon.

However, it should be noted by not providing the traffic for the merchant, Shopify’s GMV is substantially lower than Amazon’s. We noted this before in the 2019 write-up:

Shopify makes 2.63% of GMV, or $361M of the $13.8 billion. Compare this to Amazon.com who makes 26.7% of GMV ($42.7 billion on $160 billion GMV, in 2018) and eBay who makes 11.7% of GMV ($10.86 billion on $92.6 billion, in 2018).

Percentage of GMV illustrates the power of owning the domain …

How will Shopify catch-up to Amazon? Two specific ways.

1. International Growth: Globally, Shopify has a better chance of penetrating various regions as the merchants (and lack of walled garden) localizes the content and offerings. There is also stigmatism towards Big Tech globally and Shopify works quietly in the background while letting the merchants remain in the spotlight. This will be popular globally — and perhaps even domestically if Shopify can deliver on the Fulfillment Center and close the gap on convenience. Point being, keep an eye on Shopify’s international growth.

The best evidence for this is Shopify’s recent partnership with AliPay. Although this does not meaningfully contribute to revenue right now, it could by next year across the key markets mentioned the press release: The new Alipay payment gateway is available now to Shopify merchants in the U.S., with more markets to come in the future, including Hong Kong, India, South Korea, Indonesia, the Philippines, Malaysia, Thailand, Pakistan, and Bangladesh.

Right now, it’s hard to predict Shopify’s success with AliPay in these regions but it’s easy to see that Shopify is welcomed in geographies where Amazon is not. Therefore, we see global as an important piece to our thesis as merchants who want to reach global audiences will likely choose Shopify over Amazon. We think this is an important competitive edge.

2. The merging of social media and e-commerce as a means for monetization. We’ve belabored the point of Apple’s IDFA changes to first-party vs third-party ads. For social media companies, the answer to weaker data will be to move away from behavioral targeting for ads and move towards direct response and e-commerce. Amazon is weak here as social media companies don’t partner with the behemoth (see below for SHOP’s partnerships). Expect to see additional tailwinds from social media driving more e-commerce traffic.

Market Forces: e-Commerce is eating Retail

There are two market forces driving the success of Shopify right now. The first is the covid pandemic grew ecommerce penetration in the United States from 15% to nearly 35% representing the same level of growth (3X) as the previous ten years combined (5% to 15%). Retailers are now online in an unprecedented number and are able to successfully compete with Amazon.

The more permanent trend will be driven by Millennials and Gen Z with 91% and 89% stating that they shop online, respectively, according to a survey conducted in June. Additionally, data from Morgan Stanley shows Millennials and Gen Z will overtake Baby Boomers as the dominant US spenders in the coming years, meaning the major US consumers of the future will prefer to shop online.

The additional outside force is the remaining addressable market. The statistics above suggest e-commerce will overtake retail while data from Stripe suggests only 5% of global commerce happens online today. This will be compounded by the overall growth in retail.

To summarize, we think the transition towards e-commerce is more permanent long-term than the market is pricing in at this time as retailers have been forced to adopt online stores and younger generations prefer this method.

Below you can see what product-market fit looks like as Shopify takes over eBay in a banner year for e-commerce.

Fundamentals:

In its most recent quarter, Shopify grew revenue 96% YoY to $767.4 million up from $714.3 million in the previous quarter and $390.6 million in the year-ago quarter. GMV grew 109% which was slightly down from the previous quarter of 119% GMV growth.

Merchant solutions revenue increased 132% YoY while subscription solutions advanced 48%. EPS of $1.13 came in 122% above the consensus estimate calling for $0.13 as the company showed its ability to earn sizable profits. Adjusted operating margins of 17% and is up from 3% in the year-ago quarter.

TTM revenue was $2.5 billion, net income of $196.5 million, and adjusted net income of $342.5 million. Here is the company’s growth over the last few quarters:

Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020

GMV $14.8 billion $20.6 billion $17.4 billion $16.3 billion $30.9 billion

GMV Growth (y-o-y) 48% 47% 46% 119% 109 %

Revenue $390.6 million $505.2 million $470 million $714.3 million $767.4 million

Revenue Growth (y-o-y) 45% 47% 47% 97% 96%

Heading into Q4, Shopify is on pace to record over $100B in GMV in 2020. The company has over 1 million merchants in 175 countries with a breakdown of United States of America 52%, United Kingdom 7%, Canada 6%, Australia 6%, and 29% rest of the world.

Monthly recurring revenue as of September 30, 2020 was $74.4 million. The company has cash and marketable securities of $6.12 billion and debt of $750.5 million.

The increase in cash was due to $2.03 billion of net proceeds from Shopify’s offering of Class A subordinate voting shares and convertible notes in the third quarter of 2020 and $1.46 billion of new proceeds from Shopify’s offering of Class A subordinate voting shares in the second quarter of 2020.

An early glimpse into Q4 shows Shopify is likely to have a big quarter as the holiday shopping season unfolds. The company announced record Black Friday sales of $2.4B, up 75% from Black Friday 2019.

Over the past two years, Shopify has doubled its share of Black Friday sales. Most impressive is the acceleration of market share gains the company demonstrated this year.

The median analyst forecast for FY 2020 is $2.85 billion (up 81% YoY) and for FY 2021 is $3.74 billion (up 31% YoY). The median analyst’s EPS estimate for FY 2020 is $3.70 to $3.31.

The harder comps for next year is one reason the stock has cooled off but I suspect that we will see stronger forward guidance as the year goes on.

Here is how Shopify’s forward growth next quarter compares to other popular e-commerce companies:

Fulfillment Center

In June 2019, Shopify introduced the Shopify Fulfillment Network, a fulfillment network that will offer timely deliveries, lower shipping costs, and provide a better customer experience for merchants and customers Last year, the company acquired 6 River Systems to help build out its warehouse automation technology.

The Shopify Fulfillment Network is a 5-year build process for Shopify that remains in the product market fit phase. At this point, Shopify is focused on building out the software but management expects to prioritize the build out into 2021.

COO Harley Finklestein remarked in the company’s Q3 Earnings Call:

“our focus in 2020 around SFN is to achieve product market fit, which we plan to continue up to — into 2021. We want to ensure that the foundation of the fulfillment network is strong and the merchants experience is outstanding before we enter sort of the scale phase.”

Shopify is focused on the long-term opportunity and does not expect to accelerate its SFN investment, as they want to take their time on such a large venture ($1B).

Ultimately, the Shopify Fulfillment Network will utilize machine learning to improve supply chain economics and logistics. The company believes a significant portion of US GMV is addressable by the Shopify Fulfillment Network.

This will help Shopify compete with Amazon as a value add for merchants to make deliveries more streamlined and cost-effective, and will also improve the customer experience for buyers by ensuring faster deliveries.

Other tools and services that Shopify provides includes Shop Pay and Shop Email. Shop Pay allows customers to check out faster the next time they shop by saving the email address and credit card information. More than 60 million buyers opted-in at the end of Q3. Keep an eye on this for an indication of strength under-the-hood.

Shop Email lets subscription plans send emails through Shopify’s system rather than adding another vendor for email.

Notable Partnerships including Social Media

Shopify has several major partnerships that differentiate its platform from competitors. One is Shopify’s sales channel integration with Instagram that allows merchants to sell directly to consumers through product tagging. This allows shoppers to discover and purchase products all within the Instagram app, shortening the path to purchase.

Instagram is a crucial component of a successful ecommerce marketing strategy as it is the 5th most popular app in the US. Shopify’s integration with Instagram allows merchants to market their products and sell those products directly through the app.

Shopify is also partnered with Wal-Mart which was recently announced in June. The deal opens Walmart's Marketplace to Shopify's small business sellers, giving these merchants access to sell their products on the 4th largest ecommerce marketplace in the US.

Early indications show that Walmart Marketplace seller additions have increased 3x from January, demonstrating that Shopify merchants are eager to take advantage of this new opportunity.

A third major partnership Shopify has is with Facebook, recently announced in May. In Facebook’s expansion into ecommerce, they partnered with Shopify to launch Facebook Shops. Facebook Shops is a free tool designed to help merchants create customized online storefronts for Facebook and Instagram. This partnership allows Shopify merchants to control customization and merchandising for their storefronts inside Facebook and Instagram while managing their products, inventory, orders, and fulfillment directly from within Shopify.

Shopify is also partnered with TikTok which was announced in October. Shopify’s new channel integration with TikTok allows sellers to connect their TikTok for Business account and feature in-feed shoppable video ads within Shopify.

Shopify merchants can easily download the TikTok channel app from Shopify’s app store and begin to run and optimize TikTok marketing campaigns straight from the Shopify platform. For now, the TikTok channel is available in the US, but sellers in other North American countries as well as Europe and Southeast Asia will be able to access the service in early 2021.

TikTok was the 2nd most downloaded free app in 2020 with a surging young audience that ecommerce companies covet. Shopify merchants are now able to tap into that global audience.

These partnerships represent a tremendous value-add for merchants and prospective merchants, giving Shopify a big advantage over competitors. At this point, an entrepreneur looking to sell products online is likely to choose Shopify for the reach the company offers, as well as the tools Shopify is frequently releasing (SFN, Shop Pay, Shop Email, etc).

Valuation

SHOP continues to trade at a premium – 32x 2021 revenue, which has remained relatively stagnant over the last five months. In comparison to peers, many of which have seen their valuations continue to climb, Shopify has become more attractive.

In July, SHOP briefly had the highest forward multiple among SaaS stocks. It is now outside the top 10.

Here is the adjusted valuation EV/1-year forward revenue when adjusted for the 3-year growth rate. This helps to put the valuation in better perspective for Shopify.

Below is how Shopify compares on sales efficiency which measures the output of sales and marketing compare to annual recurring revenue. A ratio above 1 indicates a sustainable business model.

Also, here is a comparison looking at consensus projections 2 years out. We feel that Shopify can easily clear these 2-year projections.

Analyst Statements:

SHOP has 14 buy/outperform recommendations, 18 hold recommendations, and 3 underperform/sell recommendations.

Wedbush analyst Ygal Arounian raised the PT of Shopify to $1,300 from $998 in September. “We continue to like the short-term trends and Shopify’s position to capture them, but this call is a longer-term one in addition to those trends, driven by Shopify’s position to capture share of the total retail [addressable market] as it builds out its retail OS,” he wrote.

KeyBanc Capital Markets analyst Josh Beck, who has an overweight rating on the stock, raised the PT from $1,150 to $1,250, said the Shopify Fulfillment Network, which was launched last year, "is a full-fledged, tightly integrated fulfillment solution for Shopify merchants and includes order/inventory management solutions, branding and data controls, and access to scalable, flexible warehousing space to sell across multiple channels."

Morgan Stanley analyst Keith Weiss said “We see SHOP growing the merchant base from 1 million today to 4.6 million by 2030 (Subscription Solutions reaching $4.2 billion), while also expanding the take rate and further powering the Merchant Flywheel (GMV reaches $737B, Merchant Solutions grows to $21 billion),” he said.

12/4 – Cleveland Research Initiated Shopify with a Buy. The analyst expects Subscription Solutions and Merchant

Solutions to experience growth better than consensus expectations in FY22

12/2 – Susquehanna Initiates Shopify at a Hold stating, “The company’s two revenue units of Subscription Solutions and Merchant Solutions have different revenue drivers and can be compared to (mostly) pure-plays in the market. For each business unit, we use a price-to-sales growth valuation given SHOP's high revenue growth levels vs. peers. We value Subscription Solutions at $200 per share and Merchant Solutions at $750 per share."

12/1 – Credit Suisse Rates Shopify Neutral with $1,100 PT, stating “Our $1,100 target price and Neutral rating for SHOP is based on our DCF analysis and implies a 2021 EV/Revenue multiple of 33x. While we remain positive on SHOP given numerous LT drivers, including: the secular shift to eCommerce, Shopify Plus, International, and adoption of additional merchant services (such as Fulfillment) we see risk reward more balanced at these levels.” 11/19 – Jefferies Upgrades to Buy from Hold stating: "We have a greater appreciation for SHOP's ability to deliver robust growth for the next several years and reach ~$10B of revenue in 2025 powered by a structural pull forward in e-commerce activity and better monetization of gross margin value."

10/30 – Argus Rates Shopify Buy with $1,200 PT stating “Although SHOP has run up sharply year-to-date, the company has a strong runway for growth in the small to mid-sized merchant market, which is only lightly penetrated.”

Shopify 2019 Analysis

Posted on October 5, 2019June 30, 2026 by io-fund

Shopify has made it clear they are in the product-market fit stage and will scale between 2021-2023, as referenced in a recent investor presentation. Product-market fit is an exploratory stage where profits are not prioritized. Once product-market fit is achieved, the growth trajectory can move very quickly.

Gross Merchandise Volumeis growing 51% year-over-year at $13.8 billion.

In June, Shopify announced the Shopify Fulfillment Network to serve as a dedicated fulfillment center and to speed up deliveries to help merchants remain competitive. The goal of the fulfillment center is to put independent retailers with 10 to 10,000 orders per day on par with the fulfillment centers of larger retailers. To date, only early access to the fulfillment center is available.

faf607f5-be25-40d7-8f8a-579174b86d69_Shopify-Premium-Analysis-10-2019.pdf

Shopify 2019 Analysis

Introduction:

Shopify is a stock that comes with a heated debate due to prospects for high growth and immense volatility. The stock has a high valuation (at times), and momentum traders are attracted to the stock, which hasn’t helped the volatility. To illustrate, 52-week low is $117.64 and the 52-week high is $409.61.

This analysis will look at where Shopify is today, and Shopify’s potential by 2023, with ideas for entry. From Shopify’s acquisition strategy and fulfillment plans, it is very unlikely the Shopify we see today will be the Shopify of the future. This is due to the acquisition strategy, and Shopify’s clear ambitions to be more than point-of-sale software.

The risk is Shopify’s high valuation compared to the timing of when Shopify will report the anticipated profits from the new fulfillment center and expansion potential (2021-2023). New investors risk over-paying now for the Amazon-like aspirations that may materialize in two years from now. In addition, investors who have early positions risk exiting due to broader market volatility that is driven by momentum reversals and rotation into value. The goal will be for new investors to enter at a price where there is upside potential and for existing investors to remain invested at an unshakable valuation.

The reason to stay long on Shopify, is that industries get disrupted and e-commerce is overdue for disruption. Amazon’s pay structure is not fair to merchants at 26%. eBay is stagnant in revenue growth for nearly 10 years (fluctuating between $8B to $10B). Shopify is already the third largest online retailer in the United States and is doing one thing very well that the others neglect: emphasizing the merchant (whereas Amazon’s focus is the customer). I believe this piece to the product-market fit will carry Shopify through the hurdles of taking market share from one of Wall Street’s favorite darlings (Amazon) – more on this below.

Product Overview

The question many investors ask about Shopify is whether it can compete with Amazon — or even Alibaba? Today, this is not a possibility as Amazon and Alibaba drive traffic to products and take a premium for helping secure the sale. They own the domain website, so customers are loyal not to the merchant, but to Amazon and Alibaba.

I believe this could be where Shopify will end up, eventually. If the fulfillment center is a success, which will take some time to test and gather traction, then the back-end will be set up for the front-end development of a website or some kind of product aggregator – whether that’s a website domain or another recommendation engine.

For Shopify, it makes sense to first build out the fulfillment center for their point-of-sale software in order for a successful pivot.

Amazon had a very successful pivot from selling books to selling all retail items. For an investor to see a pivot, it requires looking beyond where the company is today.

Shopify counts over 800,000 merchants as customers compared to Amazon’s 5 million marketplace sellers. Shopify charges the sellers 2-3% compared to 26.5%. Amazon is also predominantly a United States presence with about ¾ of sales occurring domestically. Shopify does not break out these numbers but it is widely understood to have a global strategy.

Perhaps unfamiliar to public markets, the phrase “chicken and the egg” is often talked about in private markets. This phrase refers to the question of which comes first for a product or service – the buyers or the sellers. Shopify’s strategy to attract merchants through increased services and decreased costs is a very valid approach, and in my opinion, this is what will cement Shopify’s success.

Shopify is very clear they are in the product-market fit stage and will scale between 2021-2023, as referenced in a recent investor presentation. Product-market fit is an exploratory stage where profits are not prioritized. Once product-market fit is achieved, the growth trajectory can move very quickly.

Source: Shopify 2019 Investor Day

Fundamentals

Shopify has grown at a pace of roughly 55%-60% year-over-year or more for quite a few consecutive years. The company is profitable on an adjusted basis, yet is not profitable by GAAP standards. The adjusted operating margins are at an estimated $20 to $30 million this year.

Adjusted earnings came in at 14 cents in the most recent quarter, up from 2 cents a year ago. Shopify reported revenue of $362 million, up from $245 million, and ahead of earnings estimates of $350 million. Net losses were at $28.7 million, or 26 cents per share, compared to $24 million, or 23 cents per share in the year-ago quarter.

Shopify’s full year revenue is expected to be in the range of $1.51 billion to $1.53 billion. GAAP operating loss is expected to be between $145 million and $155 million with an adjusted operating income of $20 to $30 million.

Next quarter, Shopify expects to report revenue between $377 million to $382 million, above consensus estimates of $374 million. GAAP operating loss is $44 million to $47 million with adjusted operating income between $0 to $3 million.

There is some criticism around the stock-based compensation that has been paid, as the spread between GAAP and non-GAAP is wider than many other companies in a similar revenue bracket.

Shopify has held frequent, secondary-offerings. In September, Shopify offered 1.9 million shares, raising $600 million. In December, Shopify sold 2.6 million shares, which followed a 4.8 million share offering earlier in the year.

GMV

Gross Merchandise Volume is growing 51% year-over-year at $13.8 billion.

Percentage of GMV illustrates the power of owning the domain. Notably, from an investment standpoint, eBay is not a growth stock with stagnant revenue and Amazon is not a pureplay – therefore, these are not perfect comparables for valuation even if their business models are similar.

With that said, eBay makes 7x more in quarterly revenue than Shopify and roughly $500 million in net income per quarter, yet Shopify commands a higher market cap than eBay. Therefore, Shopify’s growth is being duly rewarded and the question remains if there is upside potential for new investors.

Product Launches & Acquisitions

In the most recent earnings call, COO Harley Finkelstein stated Shopify will spend $1 billion on the fulfillment center over the next five years, while CFO Amy Shapero said the company plans to bring seven warehouses online this year.

The announcement of the fulfillment center places Shopify closer to online retail rivals, such as Amazon and eBay, while distancing Shopify competitively from point of sale systems, such as Square or Stripe. Shopify will also offer custom shipping boxes and additional value adds, although the real value is in easing the inventory and fulfillment details that can become complicated with third-party logistics providers.

Notably, eBay announced a rival fulfillment center at their user conference in July.

This month, Shopify announced the acquisition of 6 River Systems, which will add collaborative robot fleets to Shopify’s Fulfillment Network. 6 River Systems builds robots that speed up production in warehouses. The company’s collaborative robot named “Chuck” guides employees through facilities and each step of the packaging process. The acquisition will bring on board robotics experts who worked on Amazon’s Kiva Systems.

The acquisition of 6 Rivers is strategic as the company will have annual revenue of $30 million in 2020 and will increase the company’s expenses by $25 million in the current year, adding no material value.

Last May, Shopify acquired the B2B wholesale purchasing platform, Handshake. Handshake’s platform offers the ability for merchants to handle sales directly rather than pass off the sale to a third-party marketplace. The team from the acquisition became part of Shopify Plus, the enterprise-level part of the business that can handle over 10,000 transactions per minute. B2B e-commerce sales in the United States reached $1 trillion in 2018, with Shopify Plus making up 24% of revenue in 2018.

Borderless Retail & B2B eCommerce

Shopify’s mission is to offer borderless retail. The company envisions a future where North American shoppers can easily and seamlessly purchase from Europe, Asia and other continents without the level of friction and delays experienced today. Expanding globally is an area where Shopify plans to offer expertise. The company offers many tools and marketing ideas for small to medium-sized retailers. Statistics provided by Shopify indicate that 57% of online shoppers make purchases from overseas retailers.

B2B eCommerce, which is the exchange of goods and services between companies, has overtaken B2C eCommerce. According to Statista Digital Market Outlook, the global B2B eCommerce market will be worth $12.2 trillion in 2019 compared to $2 trillion for the B2C market. Keep in mind, Asia Pacific contributes 80% to the market, with the majority off limits in China, with North America’s share being 12%. According to Gartner, spending on B2B eCommerce is expected to grow at over 15% during 2015-2020. According to Statista, the North American Market is estimated to be worth $1.4 trillion in 2019, up from $606 billion in 2013, growing at 15.3%. Europe is growing at 5.6% CAGR.

source: Statista

Shopify is not on the map as a competitor in the B2B eCommerce space. The major players are Amazon, Alibaba, Rakuten, Mercateo, Global Sources, Walmart and IndiaMART.

Amazon, especially, is doing well in this space and has made an effort to work with startups with Amazon’s newer B2B platform called Launchpad. The company partnered with crowdfunding platforms, venture capitalists and startup accelerators, like Kickstarter, IndieGogo and Y Combinator, to provide capital to help B2B startups launch and scale. The UK launch of the platform was also supported by the startup community and platforms such as Crowdcube. This is more of the level where Shopify competes, compared to Alibaba or Mercateo.

Conclusion:

Shopify has stated they are in the product-market fit stage. Investors should use this to their advantage as many doubting investors may lose patience by the time the company reaches its growth trajectory stage. The financials are not likely to provide the safety net most investors need to be comfortable as the company is 1-2 years from its major growth phase.

Shopify currently has a forward price-to-sales of 24, and thus, you should believe in a company’s strategy when there is a higher valuation. From a go-to-market strategy and unique value proposition perspective, Shopify has an excellent strategy, in my opinion – which is to focus on the merchants. You can expect Shopify to undercut Amazon on the merchant costs while iterating until their fulfillment is on par. This is attacking Amazon on the flank, so to speak, rather than head-on by focusing on the customer. Therefore, with proper execution, Shopify has a viable competitive advantage.

Technical Analysis

By Knox Ridley

Moving Averages

Shopify (SHOP) has broken both its 20-day and 50-day moving average, with the 20-day crossing over the 50 to the downside. This crossover is notable, but as you can see, this happens quite frequently when SHOP goes into a correction.

The 20-day is typically viewed as a normal pullback defense, while the 50-day is considered an uptrend defense.

The 20-day is clearly pointing down, which can be seen in the above chart by looking at the orange line, while the 50-day is just beginning a slower arch down, which can be seen in green. When the 50-day begins to shift its direction, it’s much more notable, and warrants caution.

The 200-day is highlighted in purple. As you can see, the price is approaching this average, but is still above it. We will want to watch how the price reacts to this level. Typically, the 200-day is strong support, so any break below should be noted.

Internal Strength

Relative Strength Index (RSI):

Regarding Shopify, there are a few points worth noting. First, notice the blue trend lines in the price of SHOP and in the RSI. These trendlines started at the December 2018 bottom. As the price moved along a specific upward trendline, highlighted in blue, so did the RSI, also highlighted in blue, which is indicating a healthy uptrend. Both of the trends broke in unison, which is highlighted by the black arrows, indicating that the current uptrend is over. The extent of the downtrend is the question to answer.

if you look at the horizontal red line at the 27 mark of the RSI, this line has acted as support for the uptrend since 2016. Until the RSI breaks above 60, the momentum is pushing down.

Moving Average Convergence/Divergence (MACD):

The MACD is an indicator used to gauge momentum as well as changes in trends. You’ll notice the intensity of the current downtrend in the MACD. The redline running along the -5.75 line has acted as strong support going back to 2016. The MACD’s momentum never broke this level. Today, the MACD broke through this support with force, making much lower lows. Therefore, the downtrend we are in may not be over.

Conclusion:

According to the MACD, the current downtrend has a level of momentum that we have not seen in Shopify, so far. The 50-day is beginning to point down, which is a further indication of weakness. We will want to watch the 27 line on the RSI as well as the below moving averages. If we break these levels, expect more downside to follow.

Head and Shoulder

A Head and Shoulder pattern is a widely regarded bearish pattern. The dotted black line indicates the “neckline,” or support at $281.75. If this level breaks, and is confirmed by price failing to break back above the price region, expect downside to follow. Anyone holding Shopify and is looking to protect gains, I would hold a stop just below this level at $281. As you’ll see in the next section, this support level also lines up with an important Fibonacci level as well, which adds to the importance of this support region.

Elliot Wave

Elliot Wave Theory is, in my opinion, one of my favorite tools for organizing a game plan for a position. According to Elliot Wave, the market moves in a 5-wave, move in the primary direction of the trend, and then 3 moves in a corrective direction, and then repeats. These moves line up with and are confirmed by Fibonacci ratios, which are viewed as accurate in many instances. Whether you believe in this theory or not does not matter, because the market believes it. In other words, time and time again we see the market react to these ratios, which is why I use it to gauge a general game plan.

Aerial View (primary count):

In the case of SHOP, from the 2016 uptrend, we can see a clear 5-wave up trend, highlighted in green. My primary count has us completing 5 waves up; however, it’s worth noting that SHOP has a history of extending its 5th wave. My primary count will be invalidated with new highs.

If you want to play this bullish scenario before confirmation, place a stop below the neckline of the head and shoulders pattern, which also coincides with the 138.2% extension within Wave 5’s count ($281). I see this support region as the determining factor – if it holds, expect an extended 5th wave and new highs, but if it breaks, I’m expecting a deeper than expected pullback.

If the head and shoulders pattern is confirmed, we will likely reach the box in green highlighted in the graph, which coincides with a cluster of extensions and retrace levels. It’s worth noting that there are not a lot of support levels below the current level we are hovering over. If this level breaks, I’m expecting a retrace to at least the 23.6% retrace level ($196 region).

Fibonacci ratios place a low point is around the 38.2% retrace – around the $125 region. This is unlikely even in a worst-case scenario, however, some Wave 2s hit these Fibonacci ratios. Due to Shopify’s fundamental strength, this is unlikely.

Once the wave-2 retrace is complete, we will start a powerful wave 3 on this larger degree in blue, which my calculations have us going well beyond to new highs. The primary goal is to catch the wave-3.

Close Up View:

The above chart offers a significant clue to where we are in the overall count, and further evidence I am using to justify caution. When we see 5-waves on any level, it indicates the direction of the main/primary trend. When we see 5-waves down on a smaller level, after a 5-wave uptrend, it’s an indication of a trend change.

We can clearly see a 5-wave pattern down from the highs, which is highlighted in magenta, and a retrace back to the exact 50% retrace level. This retrace level unfolded in a 3-wave corrective pattern. This information on the micro level tells me that more downside could follow. This is important because even if you want to play the upside, then please mind the $281 region as an appropriate stop.

Category: Software