Shopify Growth Rate Stuns Again

Jon Markman

There is a small Canadian online retailer that is growing so fast it puts ((AMZN) -Get Report) to shame. And most investors still don’t understand what it does, and why it’s a great investment.

Shopify ((SHOP) -Get Report) reported blowout financial results Wednesday. Second quarter revenues rose 97%, to $714 million. And the business is only getting started.

The Ottawa, Canada-based company makes software and services to help main street businesses move their storefronts online. Marketing gurus call this an omnichannel, the ability for customers to buy products both online and in physical stores. At Shopify, managers call it “the business model”, and now they’re making it even easier for mom and pop.

In the past, Shopify customers had to do their own fulfillment. That meant schlepping products down to the local FedEx store or post office. However, last June, The Financial Post reported the company added a fulfillment network, better customer-facing software tools and developer kits to make it easier to embed its software applications on small business websites.

These additions make Shopify a full cloud-based e-commerce platform. Customers can easily monitor their web, mobile, social media and physical storefronts. They can manage inventory, process and ship orders and build customer relationships. There is even robust data analytics and financial reporting tools, as well as access to financing.

You might think these developments would put Shopify in Amazon’s crosshairs, but the relationship is more complex. While both companies compete for third-party retailers, the actual relationship is friendly.

Amazon Webstores began in 2010 as a way for sellers to access distribution. Sellers paid a monthly fee of $78 and about 3% of sales. But the online giant closed that business to new sellers in 2015. And that very decision led to the rise of Shopify.

Amazon Marketplace has since replaced Webstores. Most of the biggest sellers use both Webstores and Shopify, making the services weirdly codependent. Both need a healthy third-party seller ecosystem to source more products and grow the ecommerce pie.

The global ecommerce market was $2.8 trillion in 2018, according to a research report from Digital Commerce 360. It is expected to reach $4.9 trillion by 2021. And Statista, another data analytics company, shows that online sales are projected to reach 17.5% of overall sales by 2021.

The realization of these trends played a part in a surprise Shopify upgrade Tuesday. Analysts at Goldman Sachs have been bearish but ahead of Wednesday’s earnings report the investment bank increased its price target to $1,127, and upgraded the investment rating from “neutral” to “buy”.

In a note to clients, Goldman analyst Christopher Merwin noted that investors may be surprised by the longevity of Shopify’s hypergrowth cycle.

It’s a good point.

Shopify is integral to helping small businesses get their fair slice on that business. The global pandemic is hastening that process.

Jean-Michael Lemieux, the chief technology officer of Shopify, tweeted on April 20 that the company is handling as much traffic every day as it does on a typical Black Friday, which is typically the busiest ecommerce day of the year. For context, in 2019, Investor’s Business Daily reported the company had $2.9 billion in sales between Black Friday and Cyber Monday.

Currently, Shopify is relatively tiny. The value of all goods sold on its platform in 2018 amounted to only $41 billion, or 1.5% of global online sales. The bet is Shopify can grab a bigger piece of that pie as it emerges as one of the platform winners. It’s a wise bet.

The press release for the second quarter earnings report tells the story of a company at the beginning of what is possible. Inside the explosive revenue growth, subscriptions were up 28%, to $196.4 million year-over-year, and Merchant Solutions, the software services mom and pop stores need to maintain their digital storefronts, jumped 148% to 517.9 million.

The value of all sales reported across the Shopify network in the quarter was $30.1 billion, up 119%. On this figure, Shopify reported adjusted gross profits of $381.4 million, up 84%. The company now has $4 billion of cash on hand.

Shopify shares are up 171% in 2020. The gains have been spectacular but this story is young. As the market begins to wake to its inherent value as a platform in a rapidly growing market, valuation is certain to rise even further.

Growth investors should consider buying the stock into any pullbacks ahead.