INTRO: When we think of the most volatile assets
within the financial space, most of us think about crypto. Despite reaching a market cap of over
$1 trillion, Bitcoin still experiences 70 to 80% crashes on a regular basis. Within the crypto
markets, these are actually rather tame crashes given what happens to certain altcoins like Luna.
Anyway, as you guys probably already know, Bitcoin is currently experiencing one of these bear
markets having sold of 71% since November. The most ironic part, however, is that Bitcoin has
actually held up better than some of the most reputable and well known businesses
in the world such as Shopify. Since November, Shopify is down 82.6%, and let’s not forget,
Shopify is not some penny stock or options contract. They were the second biggest
ecommerce player in the world only beaten out by Amazon. And at the peak, they were $228 billion,
but now, they’re only worth $38.5 billion. This means that within 8 months, Shopify has lost $190
billion worth of maket cap. Now of course, you could argue that the entire market is crashing,
and that’s true. But, to my knowledge, Shopify is thus far the worst performing large cap
company in the world. So, what happened to Shopify?
THE DROPSHIPPING BUBBLE:
One of the driving forces of Shopify over the past few years has been the dropshipping bubble.
I mean, how many times have you heard about teens making 6 if not 7 figures on
Shopify every year. And, let’s not forget about all those dropshipping and Amazon FBA gurus on
YouTube. Now, I’m not trying to say that all of these guys are scams or that dropshipping doesn’t
work. Dropshipping is absolutely a viable business model and people who really know the business will
do well regardless of how competitive it gets. With that being said though, the vast majority
of people who are getting into dropshipping aren’t looking to start a series business.
A lot of them are trying to make some quick money on the side, and this was especially true
at the beginning of the pandemic. In April and May of 2020, the interest in
shopify literally doubled. And it wasn’t just entrepreneurs that were interested in Shopify.
Investors were also quite intrigued by the idea. Most investors didn’t want to start their own
stores or anything, but they were quick to identify all of the extra interest heading
towards Shopify. And as hopeful entrepreneurs piled on on the customer side, investors piled
on on the investor side, and it wasn’t long till Shopify stock was sent to the moon.
From the pandemic bottom, Shopify stock would grow nearly 500% within a matter of months.
While this likely felt super rewarding to Shopify investors, this was also completely unsustainable.
Shopify’s PE ratio or price to earnings ratio went to extreme levels of over 600. Now,
it should be noted that Shopify has historically reinvested the vast majority of their profits,
so their net income is abnormally low which skews their PE ratio, but this does not
apply to their PS ratio. Shopify’s PS ratio or Price to Sales ratio also skyrocketed to 53.
To put that in perspective, even Tesla only had a peak PS ratio of 24 meaning that according to
this metric, Shopify was valued twice as richly as Tesla. Clearly, this was a hyper valuation
that was just waiting to crash, and that’s exactly what would happen as the new interest in Shopify
fell off a cliff. Here’s the thing, most people who try dropshipping don’t actually make it.
In fact, nearly 90% of dropshippers quit within the first month after not making as much money
as they originally envisioned. This number rises to 96% if we zoom out to the first 6
months of business. Out of the remaining 4%, it’s likely that a good portion just continue
to treat dropshipping as a side business. They might make 2 or 3 thousand dollars every month
which is great supplemental income, but not quite enough to quit your job over especially given how
volatile dropshipping income can be. Considering this, only about 1 to 2% of dropshippers
actually end up becoming long term customers of Shopify who make them a lot of money. And
this becomes abundantly clear when we take a look back at the google trends graph.
The new interest in Shopify died off as quickly as it went up. And as the hype amongst entrepreneurs
died off, it was just a matter of time until the hype amongst investors also died off.
AWFUL QUARTERS:
As new entreprenuer interest died off, it was only natural that Shopify’s financials reflected that
sooner or later, and that’s exactly what’s been happening over the past few quarters. Revenue and
profit growth has slowed down, and Shopify expects these metrics to slow down even more in the coming
quarters. Hearing that, you’d probably think that Shopify’s revenue was down 50% or something, but
that’s not actually the case. In fact, Shopify’s 12 month revenue and gross profit are still higher
than ever before. Not to mention, neither of these metrics have ever gone down on a 12 month basis.
But, investors are fearful that Shopify is close to posting their first year over year contraction.
If we take a closer look at Shopify’s year over year growth in gross profit, you’ll see that this
growth rate is lower than we’ve ever seen. Shopify has historically posted 80 to 90% growth quarter
after quarter, but today, this growth has dwindled down to just 14%. Now, I know this makes a lot
of people in the comments quite frustrated because it’s completely unrealistic to expect
that a company grows forever. 14% year over year growth is still a great number from a fundamental
perspective. But the thing to keep in mind is that the stock price had priced in over 50% annual
growth for years to come. So, a mere 14% was simply not enough to appease investors. Something
else to note is that Shopify’s financials aren’t as peachy when we take a look at their net income.
Shopify’s net income has never been particularly high given that they just reinvest everything,
but since the end of 2020, Shopify’s net income was finally starting to reach respectable levels
until the last 2 quarters. During these quarters, Shopify lost $371 million and then $1.47 billion.
These losses can be traced back to a couple of factors starting with
increasing operational expenses. Shopify is spending significantly more across the board.
Sales and marketing has increased from $186 million to $303 million. Research
and Development has increased from $175 million to also $303 million. General and administrative
have increased from $67 million to $108 million. And finally, transaction and loan losses have
increased from $10 million to $20 million. As you can see, all of these operational categories have
increased by atleast 60%. Meanwhile, revenue has only increased from $988 million to $1.203 billion
or roughly 21%. It seems that Shopify has yet to account for diminishing growth, and that they’re
spending as if they were still growing at 70 to 80% per year. Aside from increasing operational
expenses, Shopify has also gotten destroyed with their investments given that they’ve
mostly invested in hyper growth companies like Affirm, Global-e, and Silvergate Capital which
are all down 70 to 90%. Such investments were the driving factor behind Shopify’s external loses
of $1.55 billion last quarter which left them with a horrendous quarterly report.
FUNDAMENTAL ISSUES:
Aside from these superficial factors that are affecting Shopify’s stock price and bottom line,
Shopify has a few fundamental issues as well starting with dropshipping. Today, Shopify has
basically become synonymous with dropshipping, and honestly, it’s probably where a significant
portion of their revenue comes from. But, Shopify was never created to support dropshipping.
The purpose of Shopify was to make it easier for small merchants to set up an online store. But,
dropshippers aren’t merchants at all. They’re actually just marketers who route orders to
Ali express. This might not sound like a big deal at first glance, but it is a big deal
for two reasons. First of all, people associate Shopify with fake gurus and get rich schemes.
And secondly, the products that are sold on Shopify are garbage quality because all the money
is being spent on marketing. Now, I’m not against marketing by any means. Spending
20% of your revenue on getting new sales makes perfect sense as a business. But, dropshippers
generally spend over 50% of the revenue on marketing. If we have a $50 product for example,
this is usually how the breakdown goes. The dropshipper spends $10 on the product itself,
they spend $30 on marketing, and then they keep $10 for themselves. Because of this,
a $50 product from Shopify is usually not even comparable to a $50 product from a physical
retailer in terms of quality and longevity, and consumers are starting to notice. Recently,
I posted a video about how physical retailers are making a comeback against online retailers,
and one of the top complaints that I saw in the comment section was that goods from online
retailers are simply trash quality. This user commented “I’d like to add that as of today,
on Amazon, most categories are flooded with the same chinese low quality products but rebranded,
so for a lot of items it’s just quicker to find them in a store”. And this guy was just talking
about Amazon. The quality problem is exponentially worse on Shopify, and this is no doubt ruining
their brand image. One way that Shopify is trying to move away from dropshipping is by growing their
own logistical services. They’re hoping that by offering small businesses logistical capabilities,
they can attract higher quality clients. With the help of Shopify, these small businesses
would finally have the opportunity to offer shipping times and prices that are competitive
with Amazon and Walmart. The only problem with this is that its basically just Amazon FBA.
The idea itself isn’t bad per se, and I’m not really worried about Shopify being able to attract
enough customers. The real problem, however, is that developing something like Amazon FBA
is extraordinarily expensive. I mean, Amazon launched the FBA program in 2006,
and they’ve spent the past 16 years refining every portion of the business. But despite this,
Amazon still posted an operational loss for their retail business last quarter. So, clearly,
if Shopify doubles down on logistics, they’re not going to be posting sizable profits anytime soon
meaning that the stock may still have a lot of room to the downside.
THE FUTURE OF SHOPIFY:
I know this video has been extremely negative towards Shopify, but I don’t want to give off
the impression that Shopify is struggling per se. Yes, their stock price has gotten obliterated and
they’re experiencing some painful quarters due to rising operational expenses and some large write
offs . But, in the grand scheme of things, Shopify is still an ecommerce giant and they are the go
to service for creating online stores. With that being said though, a lot of their growth in recent
years has come from dropshipping which is not the best for their long term business. After all,
I don’t think Shopify wants to be an American gateway to Ali express.
Their real goal is to become small merchants’ best friend, and that’s exactly what they’re trying to
do with their logistical services. But this is by no means a small undertaking, and it’ll take
several years for such a plan to produce returns. In the meantime, Shopify will likely post little
to no profits. And in our current risk off market, that’s basically a death sentence and I wouldn’t
be surprised if Shopify ends up selling off 90-95% before finally bottoming. If you’re willing to
hold through this potential short term volatility however, Shopify will likely be a phenomenal
investment 10 years down the line, but that’s just what I think and it’s not financial advice. Are
you guys a fan of dropshipping? Comment that down below. Also, drop a like if you wish that online
products weren’t garbage quality. And of course consider joining our discord community to suggest
future video ideas and consider subscribing to see more questions logically answered.