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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 $120B.
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. This year, the share price
has gone up from $322 in March to the north of $1000 a share these days. That's a massive
leap in a short time, and it leaves its valuation at $126B, as of September 2020.
Yeah, talking about Shopify these days is talking about eCommerce hype and hot stocks.
They just had the best second quarter of their life and kept growing fast.
Let's look at what's going on with this company and the future of e-Commerce. Welcome to Company
Forensics: Shopify.
Consumers are shifting from brick and mortar stores to online shopping faster now. The
wild success of Shopify in the last few months is a sign of this eCommerce spike.
You might have also heard about a pandemic virus that put the world in lockdown, making online
shopping pretty much a standard for many people.
Reports say that total online spending in May this year hit $82.5 billion, growing 77%
YOY. 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 1M 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 this year:
In the second quarter of 2020, Shopify almost doubled revenue from the previous period,
making $714M. 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 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
could be overvalued and inflating a bubble.
Answering this question requires a technical analysis that we won't do here. In the end,
it has a lot to do with the investor's interpretation of the market.
But let's check out some indicators and try to understand what's up with the hype. First,
let's know what does a bubble in the market means.
according to 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% YOY, as of the second quarter of this year.
Second, Merchant Solutions is a global payment processor that facilitates services like automated
recurring billing, mobile payments. They get a commission from these solutions, and it
has been outgrowing the revenue from the subscriptions.
And they keep expanding their services and features. They're 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 $450M; 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 this, 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 this
year, you can see the valuation of its current assets at $4.3B. In contrast, their current
liabilities were $320M.
Without 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
billion to spare.
All this doesn't answer if the company is overvalued or not, but maybe an indicator
that the company will not go bankrupt anytime soon. Analysts suggest that this high liquidity
can be most valued in the current market, given the pandemic's economic instability.
Shopify started as a solution to help small and medium businesses sell online. The company
CEO, Tobias Lütke, 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. Lütke 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
few months have been critical and can be setting the pace for the future.
Today, it still hosts small and medium businesses, and they are at the core of their mission.
Yet, they also power stores for companies like Tesla, Nestle, or Budweiser.
The total value of orders managed on Shopify for Q2 this year was $30.1B, growing 119%
from last year, and already surpassed eBay's.
Having caught up with eBay in metrics like this makes Shopify the next real contender
for Amazon. Right? Yes and no.
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 $30B this year, Amazon's was around $335B in 2019.
But 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 operations and is joining forces
with Shopify now. In June, they announced a partnership that will bring around 1200
Shopify sellers to the Walmart marketplace this year.
It may not sound like a lot, but it can be just the beginning of this relationship. The
vice-president of Walmart's marketplace, Jeff Clementz, stated at the time:
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 evident 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. A few days ago,
in early August, this company entered the stock market with an initial offering priced
at $24 a share.
The road to catching up may be long for them, but they're already in the fight, and investors'
interest in e-Commerce is not slowing down. You may have noticed some new lighting and
vastly better audio in the last couple of videos and we spent some money on improving
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that you grab yours from the description. Do you think Shopify is suited up to give
Amazon a run for its money in the future? Or are they just in a different league? Let
us in the comments. See you next time.