Today we look at a tech company as a longer term investment. I've liked this company for a while but, they've obviously had their issues including an ill-timed acquisition which they could not digest. But, they've been quick to fix their errors and their long-term strategy is actually quite clever.
Shopify (SHOP) has quickly become a dominant player in the e-commerce industry, revolutionizing the way people buy and sell products online. The unprecedented events of the COVID-19 pandemic had a profound impact on e-commerce as we saw business and people pivot quickly to online sales channels to survive. This sudden shift in consumer behavior created a surge in demand for e-commerce platforms like Shopify. Like other tech companies, Shopify saw its stock price soar during 2021 only to give up much of its gain in 2022.
However, the company itself has been building all throughout and we think they are poised to do well in years to come because of their strategy.
As we see it, the main driving force behind Shopify’s success is the power of their partnerships. Shopify has managed to transform itself from a simple drop-shipping e-commerce platform to a company with a robust infrastructure and ease of use, became a go-to solution for many entrepreneurs and small businesses looking to establish or expand their online presence.
Some of their partnerships include:
Leading payment processors, such as PayPal and Stripe, to offer secure and flexible payment options to businesses and their customers.
Shopify's integration with Pinterest allows businesses to easily promote their products on the popular visual discovery platform.
Shopify has integrated with Facebook to enable businesses to easily create and manage their online stores directly on the social media platform.
Shopify has also established partnerships with shipping and fulfillment providers, such as UPS and FedEx, to streamline the order fulfillment process for businesses.
Shopify has partnered with Intuit to leverage the power of Quickbooks to automatically brings in orders and payouts from a merchant’s Shopify store and do all the accounting in one place. But, they’s also taken this partnership one step further to include Point-of-Sales (POS) systems. Shopify is now able to support brick-and-mortar retailers with POS systems, adding yet another product stack for additional revenue generation.
The Company is also targeting enterprise level customers - not just individuals and small businesses. This means that they can leverage their e-commerce platform for existing large retailers who don’t have the best online presence. It will be a plug and play model, and larger customers obviously have much less churn.
Finally, the recent news on which the stock rallied - they’ve partnered with Amazon to allow buyers to purchase from merchants on the Shopify Platform using Amazon Prime. This helps merchants track sales more efficiently and they leverage the power of Amazon Prime.
With the sale of the logistics arm (namely Deliverr) to Flexport, they now have a dedicated logistics partner. Shopify bought Deliverr just last year for $2.1 billion. In exchange, Shopify will receive a stake of about 13% in Flexport, bringing its total ownership in the privately held company up to the high-teens, the company said. Flexport will become the official logistics partner for Shopify, which provides e-commerce tools for merchants. It will also acquire Shopify’s warehouses.
The purchase of Deliverr seemed to have been overly ambitious for the company. But, acknowledging their mistake and making the best out of a bad situation, is something we should give them some credit for. They took a write down on this deal which hit their earnings but, Shopify is now Free Cash Flow positive and unloading the delivery company will actually streamline their operations and help with cash flow generation.
They've also cut 20% of their staff in an effort to cut costs and become more focused. At the recent Goldman Sachs tech conference, their CFO categorically said that this was not just a fire-and-hire-back strategy because of the current macro but rather a decision to improve their operations for the long run.
Shopify operates on a subscription-based business model. The company provides a platform for businesses to create and manage their online stores, offering a range of features and tools to facilitate e-commerce operations. Merchants pay a monthly subscription fee to access the Shopify platform, which includes features like website hosting, customizable themes, payment processing, and inventory management.
In addition to the subscription revenue, Shopify also generates revenue through transaction fees on each sale made through its platform. The company offers different pricing plans to cater to businesses of all sizes and scales.
Shopify’s strengths in offerings include:
Multi-Channel Selling: Shopify enables businesses to sell their products not only through their online store but also through various other channels, including social media platforms like Facebook and Instagram.
Abandoned Cart Recovery: This feature allows businesses to recover potentially lost sales by sending automated emails to customers who have abandoned their shopping carts.
Analytics and Reporting: Shopify offers robust analytics and reporting tools that provide businesses with valuable insights into their sales performance, customer behavior, and other key metrics.
The impressive growth of Shopify stock can be seen in the company's financial results. In the most recent quarter, Shopify reported a revenue increase of 57% year-over-year, reaching $988.6 million. This surpassed analysts' expectations and demonstrated the company's ability to generate substantial revenue even during challenging times. Shopify's subscription solutions revenue grew by 62%, while its merchant solutions revenue increased by 52%.
The company's gross merchandise volume (GMV), which represents the total value of goods sold on its platform, reached $37.3 billion in the same quarter, reflecting a 65% increase compared to the previous year. This highlights the strong demand for Shopify's services and the growing number of businesses choosing to sell their products through the platform.
The stock has pulled back from its recent rally on the Amazon Prime news. A good area for entry could be if the price holds at $55, with a stop around $51. If it doesn't hold this level, the price would probably go much lower and then we need to reconsider entry at a lower level.
We would be looking at this for a longer term investment for all their strategies to play out - a time horizon of two to three years.