Shopify: A Sustained Success Story
A complete analysis of Shopify
Data and metrics were pulled from publiccomps.com — the best benchmarking tool & platform for enterprise software investors. All other tables were made, and graphs pulled from various sources on the internet.
Shopify is an all-in-one e-commerce platform that enables users and businesses to create a full-scale online store using its site creation, hosting, and payment platforms.
Management & Founding Story
“To me, a great company starts with a great product and ends with a great product.” - Tobi Lutke, CEO Shopify
Shopify’s founder and CEO, Tobi Lutke, is a technical founder who is one of the pioneers of global e-commerce and understood the pain points of online platforms prior to launching Shopify.
In 2004, alongside his co-founders, Tobi initially founded Snowdevil to sell snowboards. At the time, online store software was built for existing big businesses that were transitioning online. It was incredibly expensive, unnecessarily complex, and infuriatingly inflexible. Frustrated with the available e-commerce platforms, Lutke, a software engineer, then designs a whole new tool through which Snowdevil operates. Dissatisfied with available e-commerce options, Lutke designed and created new software to run Snowdevil, but it quickly became apparent that the software was more valuable than the site.
“I set up our online store based on a variety of different systems such as Miva, OsCommerce, and Yahoo stores. Truth be told, all those systems made my skin crawl because of how bad they were. The final straw was when I got a custom design made for my snowboard store and I couldn’t get it to work in Yahoo stores. We had this great CSS-based layout done with all these new fanged ‘web standards’ and the customizability of Yahoo Stores barely allowed me to change the background color of the top frame.” — Tobi Lutke in 2010
Inspired by his experiences with Snowdevil, Shopify was officially launched as a set of tools for merchants to build their own sites. Shopify focused on the essentials like customizable store templates, tracked order feeds, inventory organization as well as payment processing and PayPal/credit card integration. Shopify’s high degree of customization lays the groundwork for its shift from being a tool to a platform.
“It is incredibly powerful if you solve the problem you actually have yourself. It’s really tough to develop a good product when you don’t have very close proximity to the people who actually use your product. The closest proximity you can have to those people is to be that person” - Tobi Lutke
By 2009, Shopify had established its value as a simpler, cheaper, and better e-commerce tool that replaced old tools like Yahoo! Stores and Microsoft Commerce. Cognizant of the evolutionary power provided by open-source platforms, developers-by-trade Lutke and Weinand made the crucial decision to construct Shopify’s first external API and an app store.
“E-commerce is a highly individualized business. Every store wants to offer a unique buying experience but providing too many features makes the software cumbersome and difficult to use. The Shopify API solves this by allowing merchants to install exactly the features they need to get the most out of their store…and our Partners can get a recurring source of revenue by developing great applications for these stores.” - Tobi Lutke, 2009
CEO Tobi Lutke embodies a couple of the key attributes as a successful visionary CEO, here I highlight just a few:
- Vision: Transformed Shopify from Snowboards -> Tool -> Platform -> Omni-Channel
- Drive: Self-taught programmer passionate about solutions
- Culture Warrior: Successfully instilled a customer-obsessed culture
- Adaptive: Constantly challenges himself and SHOP to look for efficiencies
- Self-Awareness: Continuous reader that utilizes mental model frameworks for improvement, created a dominant business about empowering others without disincentivizing competition.
“Instead of stifling this enthusiastic pool of talent and carving out the profits for ourselves, we’ve made a point of supporting our partners and aligning their interests with our own. In order to build long-term value, we decided to forgo short-term revenue opportunities and nurture the people who were putting their trust in Shopify.” - Tobi Lutke, Shopify Shareholder Letter (2019)
“A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.” - Peter Thiel, Zero to One (2014)
The key takeaway from this anecdote is that Tobi understood the painpoints of e-commerce, and had the foresight and adaptability to see how he could develop a platform to empower other SMBs.
Company Overview
Shopify currently has over 1 million merchants across over 175 countries.
Company Timeline
Shifting to the platform: By 2009, Shopify had established its value as a simpler, cheaper, and better e-commerce tool that replaced old tools like Yahoo Stores and Microsoft Commerce. Cognizant of the evolutionary power provided by open-source platforms, developers-by-trade Lutke and Weinand made the crucial decision to construct Shopify’s first external API and an app store. The API and App Store enabled Shopify Partners (designers, devs, agencies) to incorporate modifications to improve merchant experience and opened the door to SHOP as a platform. In 2018, SHOP merchants used an average of 6 apps, up from 3 in 2016 and 1 in 2012.
Revenue Segments: Shopify’s two revenue segments are 1. Merchant Solutions (60%, Q1 2020), and 2. Subscription Solutions (40%, Q1 2020). The company has been shifting focus to merchant solutions as part of a shift from a tool to platform. Shopify’s extensive merchant network is an informational advantage that has allowed and continues to allow the company to stay in front of evolving merchant trends, including the shift to mobile. Its also worth noting that the subscription segment operates at a ~80% gross margin (due to the low overhead), whereas merchant solutions operates at ~38% gross margin.
SHOP Subscriptions: Shopify charges a monthly subscription fee (MRR) for its software services. Previously, Shopify used to charge customers a fixed percentage of sales, which had the adverse effect of discouraging high-volume merchants. In 2007, Shopify switched to a subscription-based model with a small percentage of the sales transaction fees that decreased with more-expensive subscriptions. This shift still gave them exposure to volume without disincentivizing merchants.
SHOP Merchant solutions: Shopify makes a fixed percentage of sales on it’s platform. Shopify continues to focus on merchant experience, adding a suite of inventory and sales statistics in addition to web statistics.
Growth strategy: Shopify primarily targets small and medium-sized businesses (SMBs) and entrepreneurs, with the majority of merchants on subscription plans that cost less than $50/month. Shopify estimates the total market to be 47 million SMBs globally.
Target Market: Shopify targets first-time sellers and providing them with the building blocks needed to establish an online store, which included developing inventory and visit/sales analytics in 2007. By focusing on intuitive user interfaces and developing extensive guides and FAQ, SHOP provided first-time sellers the opportunity to set up a new store “within minutes.” The appeal was “obvious” to fellow merchants, though sales were slow at first ($8K/mo in ’06) given the poor customization and user interfaces at competitors.
Industry Overview & Competition
Shopify operates in the e-commerce space, primarily targeting SMBs.
The E-Commerce industry’s main competitive factors can be bucketed into the following three categories:
- Merchant startup: Simple to use, cost-effective. secure and reliable, brand support
- Growth Avenues: Integration of other channels, breadth, and depth of services, Scalable, brand recognition
- Ecosystem expansion: Innovation, Vision
Shopify is the only platform (horizontal or vertical) that competes favorably in all three categories
Misconceptions about Shopify’s competitive landscape:
- E-Commerce platforms like Shopify do not directly compete with AMZN or EBAY. Online marketplaces/retailers enable merchants to sell but do not provide the functionality to create their own brand and platform and do not enable DTC distribution.
- Content Management Systems have widespread installation bases, but they are not primarily focused on e-commerce. WordPress (WooCommerce) and Wix are website construction platforms that have developed plug-ins for e-commerce.
The E-Commerce S-Curve
Disruptive technology always begins with very slow adoption that then accelerates quickly. The barriers to this are a technical learning curve, high price, complex products, lack of an ecosystem. However, eventually, the barriers are subsided, and the technology moves on the S- curve from the early adopter phase into the majority phase. At this inflection point, a massive wave of demand kicks in, which is seen in unit economics expansion.
While Shopify has certainly seen inflection over the last 5 years, I still believe we’re at the early parts of TAM penetration, as SHOP themselves believe there's a $78B TAM for the SMB e-commerce space (currently just over 2% penetrated).
The first half of my thesis focuses on the unique & durable business model SHOP has as a platform, the reduced friction they see, as well as the strong unit economics it still has — especially for Plus Merchants.
The latter half of my thesis focuses on understanding e-commerce inflection through Shopify’s strong unit economics, and why Shopify actually has two TAMs to compete in.
Thesis
High level: 1) Shopify has a strong value proposition and is a durable platform; 2) Shopify still offers compelling unit economics which furthers my belief in its ability to continue growth on the S-curve because of a large and growing TAM; 3) COVID-19 fundamentally changes the world in 3 ways I discuss, Shopify is best positioned to capitalize on this.
Thesis #1: Shopify is positioned to continue to be a disruptive & durable platform.
A. Shopify is the de facto e-commerce platform. Shopify offers the best-in-class product in the rapidly growing Small to Medium merchant market (B2C) and is currently expanding into the larger merchant market. It sees no sales friction and their dominance as the mission-critical platform for SMBs, the potential for future pricing power they have is unrivaled.
Fundamentally, Shopify is a business built out of necessity to empower small business merchants to achieve more.
“The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.” - Peter Thiel, Zero to One (2014)
B. Under-appreciated competitive moat: With any company, competition is usually labeled as one of the main risks; however, Shopify was attacked by Amazon and eBay: both gave up — a demonstration of the power of SHOP’s moat and a de-risking event. For this reason, I don’t believe Shopify will see relevant competition and its market can be considered a vertical SaaS industry, thus allowing it to continue to trade at a premium multiple.
- Amazon (2010) developed internal capabilities while eBay (2011) acquired a competing platform (Magento), but by 2015, it was obvious that both were losing ground to Shopify.
- July 2014: eBay announces closure of its SMB products Magento Go and ProStores.
- eBay then sells the entire Magento platform Holdco 12 months later for a 61% loss vs 2012 acq. Now, eBay pushes its merchants to BigCommerce
- March 2015: Amazon announces the closure of its SMB product Amazon Webstore. In its announcement, Amazon pushes its merchants to Shopify
“Shopify can both in the long run be the biggest competitor to Amazon even as it is a company that Amazon can’t compete with: Amazon is pursuing customers and bringing suppliers and merchants onto its platform on its own terms; Shopify is giving merchants an opportunity to differentiate themselves while bearing no risk if they fail.”- Ben Thompson, Stratechery (2019)
Existentially, Shopify serves as an attractive alternative for a growing number of firms and online shoppers who don’t want to give their business to Amazon.
C. Shopify maintains a strong value proposition for merchants and creates a developer-centric ecosystem. The API and App Store follows the Salesforce model in that it enables Shopify Partners (designers, devs, agencies) to incorporate modifications to improve merchant experience and opened the door to Shopify as a platform. In 2018, Shopify merchants used an average of 6 apps, up from 3 in 2016 and 1 in 2012.
- Developers can build and deploy applications to the Shopify App Store that any store can subscribe to. Shopify takes 20% of each sale.
- Like Salesforce, this ecosystem ties developers in. New software businesses are being built daily on the back of Shopify, and that number will only continue to grow. With more than 4,100 apps available, there’s a literal army of developers working to build a better overall platform.
- These developers, as part of the partner ecosystem, have access to a robust referral system, allowing them to make extra money by driving stores to Shopify. More than 24,500 partners referred merchants to Shopify last year per the company’s annual letter.
- This established ecosystem is the backbone of the moat: Shopify’s ecosystem of app developers, designers, partners, and experts accelerates a merchant’s time to market, increases functionality, and supports innovation. These benefits in-turn attract more contributors to the ecosystem in a virtuous cycle.
- The ecosystem is what gives Shopify scale, they can afford to spend more on R&D, S&M, and new product features, unlike other competitors. Their scale is what allows them to offer services like their fulfillment network, which is nearly impossible for other competitors to replicate because they can’t reach Shopify’s scale.
“Reaching scale not only means you’ve captured a slice of the market, but also that you’ve set the pace of innovation for the rest of the industry” — Tobi Lutke
D. Shopify is the quintessential platform and succeeds in the aggregate. — From Ben Thompson’s Stratechery
“Everyone in the world wants to be a platform, but you’re only really a platform if the value of the ecosystem on top of a platform is larger than the company who owns the platform.” - Tobi Lutke, 2018
- What is powerful about this model is that it leverages the best parts of modularity — diversity, and competition at different parts of the value chain — and aligns the incentives of all of them. Every referral partner, developer, theme designer, and now 3PL provider is simultaneously incentivized to compete with each other narrowly and ensure that Shopify succeeds broadly because that means the pie is bigger for everyone.
Shopify as a platform is incredibly durable, and combined with their established ecosystem gives them unique dependency and thus pricing power over their merchants. The durability gives me great confidence that Shopify will still be relevant and the market-leader in a decade, and the continued growth of the ecosystem allows them to continue to provide value and thus have pricing power over its merchants. In 10 years time, investors will still recognize Shopify as a quality e-commerce platform.
Thesis #2: Over a decade since transforming into a platform, Shopify still offers incredible unit economics, especially for Plus. The growing demand of Plus merchants, which is still small, will continue to drive future revenue growth.
I look at 10Y Lifetime Value/Customer Acquisition Cost (LTV/CAC) for both average and plus merchants on Shopify.
Per their IR team, Shopify no longer discloses revenue separately for Plus merchants. Below I show the MRR growth for Shopify Plus and Non-Plus MRR by quarter.
Monthly Recurring Revenue (MRR) growth is driven by two factors:
- Net Merchant Adds
- Plus which has better Unit Economics (CAC/S&M)
Notice the MRR acceleration in 2017, this was primarily driven by a 71% YoY increase in Net Merchant Adds (shown in the table below).
The volume of Gross Merchant Adds has been under-appreciated when SHOP reports EOP Merchants (currently disclosed over 1 mill for end-of-year 2019 so I estimate it at 1.01M).
Here, I estimate Shopify Cohort churn, using assumptions of a 1Y attrition rate of 50% and a 2Y attrition rate of 25%, and each year after that decreasing by 2%.
Unit economics: LTV/CAC
A couple of things here to note:
- Total Revenue per merchant has been increasing with MRR as the platform expands.
- SHOP had consistently spent ~$0.60 of S&M per $1 of GP but this number has been decreasing.
- I calculate a CAC of 1.3k (recent spike in cost) indicative of the prevalence of Plus which has grown faster than average merchant growth. Also, while CAC % has grown sharply, Gross Profit has significantly outpaced it.
Next, I calculate LTV for average merchants, and for plus merchants. This is where I do some back-of-envelope math.
On the LHS I calculate 10Y LTV for average merchants, using the GP/merchant obtained in 2019. Like the customer cohort churn calculations, I assume a 1Y attrition rate of 50%, followed by a 2Y attrition rate of 25%, and 2% attrition rate for each year after that. I then discount the GPs using a discount rate of 10%. For average merchants, we calculate an LTV/CAC of ~2.5x.
On the RHS, I calculate 10Y LTV for plus merchants. Unlike average merchants, I use a 1Y attrition rate of 25%, followed by a 2Y attrition rate of 10%, and 5% for each year after that. We calculate the gross profit from plus merchants to be 42.5k. For this calculation, we use the 14.6M MRR x 12 months for plus merchants (publicly disclosed), and for merchant solutions from plus we use 122.36M which we obtained by maintaining a similar ratio between merchant solutions & subscription as 2018 (in which it was last publicly disclosed). This gives us 297.56M of total revenue from plus merchants.
Next, we calculate CAC for plus merchants. Using the 5,300 2018 Plus merchants and the 7,100 2019 plus merchants (publicly disclosed numbers), and assuming a 25% attrition rate among the 5,300 plus merchants, we calculate CAC for plus merchants to be 38.56k.
Using a similar calculation for 10Y LTV, we get the lifetime gross profit for plus merchants to be 158.6k, and with a CAC of 38.56k, this gives us an LTV/CAC ratio of ~4.1x.
Note that my attrition rates used were fairly aggressive. The table shows that 90% of merchants and 70% of plus merchants fail by year 10. If less aggressive attrition rates are used, the unit economics can be even higher.
Shopify is the best platform for merchants, everyone & the market knows this, but future growth is going to be driven by the growth of Shopify Plus (only 7100 merchants today), which offers many more of the compelling features for scaling successful SMBs into a large enterprise.
Plus offers even more compelling unit economics, and the growth of this ecosystem allows Shopify to gain further penetration among larger enterprise merchants.
Management stated in the most recent earnings call Q1 FY21 on seeing new demand for Shopify Plus:
From the last earnings call Q1 2020:
We certainly are seeing new types of merchant verticals [on Plus]. We had sort of mentioned that we’re seeing brands that traditionally had not gone direct-to-consumer. We mentioned Heinz and Lindt chocolates literally go from contract signing to full launch of their direct-to-consumer store in seven days and five days, respectively. We’re also seeing the grocery category, again, a vertical that Shopify Plus has not traditionally seen become a real thing. In Canada, we’re seeing some of our largest grocery chains, like Loblaws and Farm Boy set up stores on Shopify Plus. So we’re excited by that, obviously. We also have changed our focus from, sort of, focusing on upgrades on Shopify Plus to more helping getting more large merchants online in our core geographies faster and so we’ve sort of pivoted our sales team for the time being to focus on getting brand-new merchants on.
And then in terms of the downgrade question, certainly, we are seeing — downgrade are happening, but what’s more — what’s most important is that they’re staying on Shopify and they’re rightsizing their businesses. And some of those downgrades have actually already reupgraded back to Plus.
In addition to compelling unit economics today, the overall market for Shopify is incredibly large and hardly penetrated.
Growth for Merchant Sales, of which Gross Merchandise Value (GMV) is the most important metric, is driven by accelerating TAM growth, and low TAM penetration (GMV currently ~1.5% of TAM). Future growth will largely come from the growth of their merchant sales segment which has incredible room to grow.
Take rate for GMV is currently ~1.7% and could reasonably 3x to about 5%. This represents a tremendous unit economics expansion as GMV will likely account for much of future growth.
Shopify quotes the SMB TAM to be $78B but this itself is underestimating growth.
From Shopify’s two segments: subscription & merchant solutions, we actually see two TAMs.
First, there’s a market of SMB merchant subscribers. Shopify quotes 47 million SMBs globally (with over 1 million, this is hardly over 2% penetration).
Second, there’s e-commerce GMV (a function of the number of SMBs and the ARPU), which is even larger than the TAM that Shopify quotes. Since ARPU and GMV/subscribers actually grow together, this market experiences quadratic growth as a product of those two separate growth rates.
Thesis #3: Shopify’s can best capitalize on COVID-19’s transformation unlike any other company (3 semi-predictions on the next decade).
“Understanding where a technology sits along the S- curve and if you are nearing that inflection point is powerful. The inflection point not only creates incredible unit growth, but it also reduces risk because one of the biggest drivers of tech company failures is faltering demand or demand well below expectations. It’s very hard for that to happen in the middle of an inflection point on the S- curve. Sometimes understanding the S-curve can help you time your exit as well. When adoption gets close to 50%, growth can rapidly decelerate.” - Alex Sacerdote, founder, Whale Rock Capital Management (2018)
There are three major secular tailwinds that have been accelerated as a result of COVID-19 and SHOP best captures this.
- Self-employment opportunities — platforms that enable work
Like we saw a post-financial crisis, platforms that enable work for people whose jobs were disrupted saw accelerated demand. Shopify’s ability to democratize self-employment opportunities irrespective of location through the empowerment of small businesses will help kindle the entrepreneurial spirit.
Airbnb, ride-sharing, and food delivery were some of the biggest winners over the last decade because they created income opportunities for people coming out of a financial crisis. Platforms that enable workers to empower businesses to create more income-generating opportunities will thrive.
2. E-commerce growth
U.S. E-commerce growth exploded starting in March and still continues to accelerate because the secular nature of e-commerce.
Back in April, Shopify CTO Jean-Michel Lemieux tweeted about Shopify seeing Black Friday level traffic every single day.
US E-commerce retail growth continues to accelerate.
Even post quarantine, I still believe e-commerce can sustain its current growth rate because of its extremely secular. E-commerce businesses should see continued tailwinds since they’re stickier and have less friction than brick and mortar retail. Thus, I argue COVID-19 was not just demand acceleration, it removed the barriers for increased adoption which opens the door for recurring demand.
Additionally, e-commerce will continue to see from decreased barriers to entrepreneurship & decreased sales friction from further mobile-commerce adoption.
Shopify identified early on that computers tended to be used for commodity-type goods while mobile and social media outlets were used for spontaneous, discovery-based purchases.
The proliferation of smartphones led to “always-on shopping” where omnichannel exposure across mobile, tablet, computers was steady in aggregate over the course of a week.
In May, Shopify partnered with Facebook to allow merchants to distribute on Facebook. Pairing Shopify’s e-commerce capabilities and Facebook’s reach and distribution channel reduces the barriers to entrepreneurship and advances the future of commerce by empowering social networks as sales channels.
3. Consumerization of enterprise technology
Consumerization of enterprise tech is corporations adopting consumer-like solutions for business use, which is often purchased through consumer channels. The widespread adoption of BYOD policies in the workplace and developers increasingly becoming decision-makers in the workplace has given employees an expectation of choice in the tools they use.
This is especially true with the growth of bottoms-up management, where individual teams have more autonomy in their decision making and budgets. Employees are not waiting around for antiqued enterprise solutions to get approved, rather they are turning to solutions that are easily deployable. While this may be a headache for CISO/CIOs, small, lightweight consumer-like solutions like Airtable, Figma, Slack, Zoom are empowering today’s corporate workers. The myriad of enterprise tools opens the door for a single platform to consolidate the necessary work tools for an entire business.
SMBs are particularly early adopters of consumerized tech, in part because most of their needs can be satisfied by high-end consumer hardware, and they don’t have the niche customization demands and thus, long sales cycles of large enterprises.
Catalysts
- Partnerships with retail giants: Walmart said it will open its online marketplace, which reaches 120M monthly visitors, to Shopify’s more than 1 million business clients. That means Walmart shoppers will be able to find goods from some Shopify merchants. Walmart is the largest retailer in the world, I believe others will follow.
- Partnerships with social media giants: Facebook said it would partner with Shopify, among other e-commerce platforms, to launch a new online shopping marketplace called Facebook Shops.
- The success of technology investments to grow Shopify Plus: In the past year, Shopify has added the following products:
- 6 River Systems to reduce friction for warehouses making the pallet-to-parcel transition.
- Shopify Plus to automate rote processes and enhance wholesale capabilities.
- Shopify Fulfillment Network to reduce friction and enable merchants to retain greater ownership of their shipping experience and build brand loyalty with their buyers.
- International to improve product-market fit outside core geographies.
- The Shopify Platform to enhance merchants’ capabilities with buyers, from Point-of-Sale to financial solutions.
- The Shopify Brand to expand awareness of the Shopify brand and inspire entrepreneurs to action.
Risks
- As long as Shopify is FCF’s margins are negative or barely positive, Shopify will likely continue to dilute shareholders for cash. Rather than taking on debt, Shopify has persistently chosen to issue new stock to raise capital. This is dilutive to existing shareholders in the near-term but has helped Shopify maintain a solid balance sheet over the long-term.
- Declining gross margins may have investors worried about the long-term profitability of Shopify. Shopify’s faster-growing segment, merchant solutions operates at ~38% gross margins. As this segment becomes a larger portion of future revenues, gross margins will likely continue to decline, which may cause doubt to the profitability of Shopify’s business in maturity.
Valuation
Shopify currently has LTM FCF margins of -5%, and given management’s stated long-term view at the expense of short-term profitability, I don’t believe a traditional 5-year projection period is relevant to SHOP, even at its current 90B valuation. I believe FCF margins can likely grow to the low 20s given Shopify’s scale & ecosystem. In steady state, they won’t need to spend nearly as much on S&M and R&D.
Thus, I use a 10Y IRR model where I’m using fwd EV/Sales multiples & FCF multiples to confirm a reasonable valuation for Shopify, sanity-checked with a 2030 PE ratio. It's possible that by 2030, Shopify still isn’t considered a “mature” given the accelerating growth of its TAM.
I use a 2030 FCF multiple of 48x, PE ratio of 94x, and fwd EV/Sales of 8.5x. The 94x PE and 48x FCF might seem high, but notice that FCFs are still growing over 40% yoy (as margins are still improving).
Revenue growth decelerates but still sees strong expansion, primarily through the growth of Merchant Solutions (which is tied to overall GMV and thus, TAM expansion). This is also why gross margins fall from ~54–55% to around 43-44% because merchant solutions (~38%) operate at a significantly lower gross margin than subscription services (~80%). I use 2030 profitability metrics of net income margin of ~12%, FCF margin of ~22%.
While it may seem expensive now, Shopify continues to roll out new platform features year after year and it is purely an assessment of the business as I understand it today, which doesn’t take into account new markets & opportunities for Shopify. This also doesn’t account for the fact that Shopify has significant pricing power over its merchants on the subscription front, has potential to increase take rate on the merchant solutions front, both of which could increase gross margins.
I believe Shopify continues to trade at premium multiples given its 1) one-of-a-kind management; 2) Strong competitive positioning w/o taking on risk as a platform which allows them to adapt and be flexible; 3) Vertical SaaS market play in e-commerce platforms; 4) sustained acceleration of GMVs as COVID-19 reduced many barriers to adoption for e-commerce.
Final Thoughts
Shopify is probably the hottest stock of the last 5 years, having grown ~30x since IPO.
While investment at its current valuation right now seems expensive (certainly the risk/reward doesn’t look favorable), and only a ~12% long term IRR isn’t compelling enough for me to aggressively buy. I’m taking a 10Y view to understand Shopify’s business fundamentals and long term underappreciated earnings growth power. I believe that E-commerce platforms that enable SMBs are still relatively early on the S-curve and when you combine that with Shopify’s exceptionally strong competitive advantage, the forecasted 5–10 year out earnings can grow exponentially.
Shopify’s strong unit economics growth and a competitive advantage prevents price compression in the stock, and thus, the company will continue to grow revenue rapidly and will be able to utilize their expense structure to create operating leverage. Also, I think SHOP sees continued accelerated growth throughout the rest of 2020. GMV is inflecting and has a long way to go, I’d expect continued acceleration on this front as merchant solutions continues to make up the majority of new revenues.
For these reasons, I’m going to continue holding Shopify stock and buy opportunistically.
If anyone has any questions/feedback/criticism about the thesis points or valuation model feel free to shoot me an email at azw@princeton.edu!
Thanks,
Albert