Technology

Shopify's Stock Highly Dependent on Online Economy

Douglas A. McIntyre

Shopify Inc. (NYSE: SHOP) stock is down less than the S&P 500 since the recent market plunge began. Most economists think the global economy will suffer due to the spread of the novel coronavirus. There might be some recovery in the fourth quarter of the year.

The advantage of Shopify for medium and small businesses is that it helps them build and maintain e-commerce platforms that run on the cloud. As brick-and mortar-retailer locations close, online commerce will become increasingly essential.

Revenue Is Exploding Year Over Year

Revenue in 2019 was $1.58 billion. In 2018, the figure was $1.07 billion. In 2017, the top line was $673 million, and in 2016, it was $389 million.

So, the growth rate is extraordinary.

However, to fuel growth, Spotify has lost money in its quest for rapid revenue growth. The net loss in 2019 was $125 million.

The 2018 figure was a loss of $65 million. And the net loss was $40 million in 2017 and $35 million in 2016.

The fourth quarter improved substantially, as the Shopify earnings report showed revenue up 47% to $505.2 million. Adjusted operating income for the fourth quarter of 2019 was 6% of revenue, or $28.5 million, while adjusted operating income for the fourth quarter of 2018 was 6% of revenue, or $21.4 million.

Adjusted net income for the fourth quarter of 2019 was $50.0 million, or 43 cents per share, compared with adjusted net income of $29.4 million, or 27 cents per share, for the fourth quarter of 2018 on an adjusted basis.

Upon reporting the numbers, Tobi Lütke, Shopify’s chief executive officer, said “2019 was a milestone year for us.” He added, “We’ve earned the trust of more than one million merchants, and we are motivated more than ever to keep lowering the learning curve so anyone, anywhere can become an entrepreneur.”

Amy Shapero, Shopify’s chief financial officer, said, “Shopify’s merchants had a tremendous fourth quarter, powered by our ongoing efforts to help them sell more and manage their businesses more effectively. … Our investments to enhance our product offerings and expand internationally are attracting entrepreneurs worldwide and helping them succeed, as demonstrated by strong GMV growth in 2019. In 2020, we will continue to invest in our portfolio of growth initiatives to better serve merchants and energize the flywheel well into the future.”

What Makes Shopify Unique

Shopify identifies itself as the “all-in-one commerce platform to start, run, and grow a business.” Its target customer base is small companies. Late last year, Shopify announced that it had hit a million paid customers worldwide.

The company uses traditional retail tactics to drive customer sign-ups. Among these is a “free trial.” This lasts for 14 days.

The company’s price model is $29 a month for a basic package. That rises to $79 for a mid-tier package. The upper end service is $299 a month.

Shopify’s services include the ability to build a complete e-commerce sales platform. It also allows clients to offer and track free shipping, offer discount codes and set up several online stores at once.

Unlike many competing e-commerce operations, Shopify offers tools and hardware that allow people to shop in physical stores. This is helpful to the brick-and-mortar part of retail, which has been decimated by Amazon.com Inc. (NASDAQ: AMZN) and other large e-commerce businesses. It also offers a fulfillment network with prices many small online companies could not get on their own.

Shopify also allows clients to target Facebook ads, which gives the clients a social media capacity that is usually reserved for larger businesses.

Amazon Is Shopify’s Biggest Problem

Amazon essentially has Shopify’s business model surrounded. On the one hand, hundreds of thousands of third-party sellers use Amazon.com for all of their marketing. For a fee, they get a turnkey solution. This also comes with a high-end e-commerce presence.

Flanking Shopify on the other side, Amazon is the world’s largest provider of cloud services. E-commerce companies with their own “front ends” use Amazon’s massive remote server capacity to handle all their storage. This eliminates the need for them to host their own web presence.

Amazon has added a new line of revenue that Shopify, and almost all of its clients, cannot match. It sells the equivalent of search ads at Amazon.com, which gives it a new line of business. It is also a way that online merchants can reach Amazon shoppers.

Oddly, some investors favor Shopify because it is in Amazon’s sector.

What Will Investors Look For in the Future?

Shopify stock hit new all-time highs during several days in February. Even with solid numbers, the high valuation was not sustainable. The stock has lost more than a third of its value since then.

Wall Street expects that Shopify needs to match the growth rate it posted from 2016 to 2019. Just as important, it needs to show that growth has to be done based on losses. That story has gotten old.