Pocket Change is a newsletter where Tony + Karine keep track of and analyze stocks we think are noteworthy (and whether we should invest pocket change into). We’ve been friends since 2013, and have been sending each other stock suggestions and portfolio screenshots over the years. Pocket Change is our way of opening up the conversation and sharing these ideas more publicly. The plan is to publish every weekend with our analysis and decision for a new stock.
Summary
🔥Revenue in Q1: $470 million
📈Stock price is up 78.6% YTD
📦GMV is up to $17 billion
Did you know?
Shopify started in 2010 by Tobias Lutke as a snowboard ecommerce company. He found the process of building the e-commerce website so difficult, that he decided to pivot the business into a website builder for other ecommerce companies to build off of, and thus launched Shopify.
What is Shopify?
Today, Shopify is an ecommerce platform that provides over 1M merchants across 175 countries with the tools to run their business. Your favorite brands - from Allbirds, Kylie Cosmetics, to your favorite local candle brand all use Shopify to build and customize their own ecommerce website (i.e. allbirds.com).
If you’re a brand, why would you choose Shopify over Amazon? Because you can go direct-to-consumer and control much of the brand experience while being able to give consumers the same benefit of simple payments, fast shipping, etc.
Fundamentals (Last Quarter Ending March 31)* (Read at the bottom of the post for definitions and why we choose these metrics to look at.)
Enterprise Value (EV): $85 billion
Gross Merchandise Volume: $17 billion
Revenue: $470 million
Revenue Growth (YoY): 46%
EV/Forward Revenue Ratio: 37x (compared to 3.5x for Amazon and 7.3x for Square)
Shopify earnings surged this quarter due to COVID-19 forcing many merchants to move their operations online.
How does Shopify make money?
Two primary ways -
Subscription (~40% of total revenue) - The price a merchant pays to basically access Shopify as a Service. This ranges from $29/month for Basic Shopify to $2,000/month for Shopify Plus
Merchant Solutions (~60% of total revenue) - Revenue that directly scales as a % of a merchant’s revenue or gross merchandise value (or GMV), the total value of everything sold on Shopify
GMV has grown quickly, reaching $17 billion, up 46% year-over-year (which was above the $16.9 billion analysts expected). Shopify is incentivized to drive the success of their merchants - helping them achieve higher sales which could lead to the adoption of other products.
Growth Opportunities
Based on 2019 GMV, Shopify has the #2 position in U.S. retail e-commerce with a ~6% market share (vs Amazon at 37%). While Amazon and Shopify are not mutually exclusive platforms for merchants, we think Shopify has an opportunity to grab more market share (analysts estimate Shopify can reach 9% market share in the next few year), as brands prefer to own their customer experience (vs giving it to Amazon), and also maintain higher margins selling direct to consumer (vs Amazon’s seller fees). Growth next year could be even stronger because COVID-19 caused physical stores to close, and many merchants need to move their operations online.
Recent news also demonstrates how forward-thinking Shopify is in terms of product and platform development.
Facebook Shops, a Shopify x Facebook Partnership creating an integrated tool helping merchants create a customized online storefront for Facebook and Instagram
Shop app, an app that Shopify recently launched to boost customers' long-term value to the company by helping customers find local retailers and track their orders
Shopify accepts Crypto payments - Over 1800 cryptocurrencies will be a viable payment option via a CoinPayments partnership
Developer ecosystem - Over 26,000 partners who create apps and themes using their robust API or provide professional services such as photography or marketing
The stock price has spiked in the last month to reflect their innovative strategy and strong position to help merchants move online.
Key Questions to Ask Yourself (before we think you should buy...)
While COVID-19 has obviously caused many physical stores to close and forced merchants to move online with Shopify, do you believe this growth in e-commerce sales is just temporary or will it continue even after things begin to open up again?
Given the announcement of recent partnerships (like Facebook), how much revenue volume and growth do you think they will generate for Shopify?
Do you think Shopify will be competitive with other online offerings from Square, Amazon, and PayPal?
Our Take
Karine: Given that I run an ecommerce marketing agency, I’m obviously bullish on the future of ecommerce and Shopify’s role in it. Shopify has well-positioned itself as a platform for not only merchants, but also has built a rich third-party developer ecosystem for additional tools and companies to be built off the platform. While the stock has been acting bullishly in the recent months, I think Shopify is currently slightly overvalued at its current price, but is definitely a watch.
Tony: The stock price is already adjusted for the growing optimism and investors should be cautious of valuation and pass on this opportunity.
* Note this is not investment advice. Please consider doing your own research before making any investments!
If you’re finding this newsletter valuable, consider sharing it with friends, or subscribing if you aren’t already.
EV (Enterprise Value) is a measure of a company’s total value. We prefer enterprise value over market cap because it includes cash and debt in its calculation and gives a truer estimate of what the company is actually worth.
EV/Forward Revenue: the total EV divided by the estimated revenue for the next twelve months. This number gives investors a metric to evaluate how much it costs to purchase the company’s sales. Typically, a lower EV/forward revenue multiple means that a company is more attractive or undervalued.