Shopify (SHOP) - Get Report is setting the bar high and jumping over it. Shopify's revenues continue to grow at a relentless pace, and at the same time its stock has soared and generously rewarded shareholders. Shopify's year to date performance has outpaced the S&P500 (SPY) - Get Report by more than 110 percentage points and shows no sign of stopping. Investors looking to participate in Shopify's prospects are being asked to pay up for its quality, however.
Strong Narrative With Numbers To Back It
Shopify came out of nowhere, and since 2016 its shareholders have seen its share price jump tenfold.
The e-commerce platform has a large breadth of services. But arguably its most competitive proposition is its all-inclusive software as a service (SaaS) platform for price-sensitive merchants.
Another facet which offers its software an edge over the competition is the careful balance between it being a user-friendly plug-and-play interface, while at the same time allowing merchants huge scalability.
In fact, despite being suitable for entrepreneurs, given its ability to scale with ease, there is no real need for merchants to re-platform.
Shopify has two segments, subscription solutions and merchant solutions.
Its merchant solution is the bigger of the two segments and as the name indicates, it's a subscription-based offering, typically with monthly subscription agreements. And as expected, its subscription solutions carry very high gross profit margins of approximately 78%.
Shopify's merchant solutions carry slightly weaker margins of 38%, but overall they are still satisfactory.
The chart shown above highlights the bullish thesis. The stability and pace of Shopify's impressive revenue growth is hard to argue with. The numbers speak for themselves. Not many companies the size of Shopify are able to post growth rates north of 40%.
The Price for Participation
At first glance you may find it odd that I've put Amazon (AMZN) - Get Report as a peer to Shopify. Surely, Amazon is not a competitor to Shopify? And herein lays the confusion for investors. At times Shopify partners up with Amazon allowing merchants to set up their e-stores on Amazon, but at other times, merchants may not use Amazon at all. Moreover, any tailwind that Amazon creates by causing consumers to spend more time online, Shopify is likely to be an indirect beneficiary.
So can it be said that Amazon and Shopify are partners? This is not accurate either, because both platforms seek their own subscriptions from merchants. Essentially, the only aspect which can be safely agreed on is that there is a large overlap between these two companies -- even if Shopify has a lot more room to grow than Amazon.
The two e-commerce platforms are very different, however. Magento is substantially more complex and a Platform as a Service (PaaS) offering whereas Shopify is a SaaS. Shopify is easy to set up, but with limited functionality, whereas with Magento merchants need extensive coding knowledge (which may involve the hiring of a coder) as well as costs associated with hosting a domain.
Finally, Square(SQ) - Get Report competes with Shopify on its point of sale (POS) and payments systems. Although Square is attempting to enhance the breadth of its own services, Square's advantage boils down to price. On the other hand, Square's functionality for serious merchants is severely impaired. Nevertheless, it still makes for a valid valuation comparative.
The Bottom Line
Shopify is led by a terrific management team focused on giving merchants the best tools and support to help them make the correct decisions. By facilitating a way for buyers and merchants to transact seamlessly, and at the same being one of the cheapest e-commerce platforms available offers Shopify a huge runway. Saying that many investors have already recognized this potential and are pricing in a large portion of its upside potential.
Shopify will release its strongly awaited Q2 2019 earnings in under three weeks' time. Stay tuned.
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