Shopify and Square: Playing to win beyond earnings
Amidst the flurry of this week’s corporate earnings in the payments and retail sectors, two companies stand out: Shopify and Square. This is not because of today’s market response, but because of what it signals for the market ahead. Set on a collision course, these two players reflect broader tension in the market. Traditional payment players seek to unlock margin and retention benefits associated with typical SaaS models while commerce platforms are becoming more vertically integrated.
First, let’s look at the numbers
While Shopify saw a 57% increase in monthly recurring revenue and a 64% increase in total volume, these growth numbers were 5% and 17% lower than the same period last year. At the same time, Shopify reported a net loss of $0.16 p/ share versus $0.15 p/ share a year earlier.
Square posted a meaningful increase in net revenue (36% year-on-year) but a net loss that was 60% greater than the same quarter a year ago. Driven by a 47% increase in operating expenses, this loss highlighted Square’s increasing investment in product development and marketing.
The market response was telling. Shopify’s shares fell more than 10% before rebounding and gaining 11%. Square was down more than 4% before gaining a bit over 1% (as of today’s closing bell). Despite the many moving parts between the two companies, I suspect that the volatility is driven by a fairly simple reason — they’ve both been spending more money to drive slightly slower growth.
However, only looking at the market response misses the bigger picture. Both companies are investing heavily to reinforce and expand their market position. Focused on platform and product diversification, this investment is driving a material change — and expansion — in the business model for both companies.
Shopify’s revenue mix has shifted over the last four years, with Merchant Solutions now accounting for 53% of revenue. Encompassing products such as transaction processing, merchant cash advance, and shipping, Merchant Solutions is increasingly placing Shopify in direct competition with existing incumbents in other sectors, including payments. This combination of revenue expansion and higher margin products should also enable Shopify to see higher profitability and continuing reinvestment in growth.
Square is responding. Square’s acquisition of Weebly is a clear sign that the company wants to accelerate its expansion into omni-commerce. Square’s subscription and services revenue has almost doubled from the same period last year. However, unlike Shopify, Square’s revenue continues to be largely transaction-based, with 82% of its total revenue driven by transaction-related fees. I expect that the Weebly acquisition will accelerate the growth of services-revenue and that the company will integrate these services into a single platform and value proposition.
What does this mean for the rest of the market?
Four emerging trends:
1. Friction and competition along the value chain will continue to increase. Players that have traditionally operated in one part of the value chain (e.g., merchant acquirers) will look to partner or acquire commerce platforms in order to increase margin and protect the merchant relationship.
2. Commerce platforms are starting to vertically integrate and add additional functionality to reinforce their market position.
3. Commerce platforms will continue to get bigger — driven by the secular growth of E-commerce and the availability of private as well as public capital for associated businesses. This growth will create network effects as other technology players will integrate to leverage the new distribution channels offered by these platforms.
4. Consolidation across commerce platforms will increase as existing players compete for control and large tech players look to enter and expand (e.g., Amazon).
Shopify and Square are a bellwether for the broader omni- and E-commerce market. Greater investment by both players will place pressure on other competitors to respond. This will be positive for retailers as choice, functionality and price improve. It also marks an increasingly pitched battleground to win the hearts and minds of the consumer as well as merchant.