Shopify stock: Understand more basics

July 5, 2020

1. Shopify’s revenue rose 73%, 59%, and 47% in the last three years
2. Shopify’s primary business is subscription-based Software-as-a-Service (SaaS)
3. It earns over 60% of its revenue from merchant solutions, which is a transaction-based business
4. Shopify’s business model has a higher turnover and lower profit
5. This threefold increase in Shopify’s valuation shows that investors expect Shopify’s revenue to grow 150% this year. 
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Stock valuation   

Shopify’s revenue rose 73%, 59%, and 47% in the last three years, as more merchants subscribed to its platform and used various merchant solutions like payment and shipping services. Even though Shopify’s primary business is subscription-based Software-as-a-Service (SaaS), it earns over 60% of its revenue from merchant solutions, which is a transaction-based business.

Merchant solutions have a low operating margin, as it includes the cost of third-party associates, with which it has a revenue-sharing agreement. Hence, Shopify’s business model has a higher turnover and lower profit. Even Amazon has a net profit margin of less than 5% but revenue of $241.5 billion.  

Hence, the correct way to value Shopify is through its sales growth. Before the pandemic, Shopify stock was trading at 27 times its revenue per share, four times more than Wix’s valuation of 6.7. Shopify’s valuation came on the back of its 50% revenue growth, which is higher than Wix’s 26% growth rate. 

But the stocks of Shopify and Wix doubled during the pandemic-driven lockdown, sending their valuations to 89 times and 14 times their revenue, respectively. This threefold increase in Shopify’s valuation shows that investors expect Shopify’s revenue to grow 150% this year.  

Can Shopify be the next Amazon?

However, traditional valuation methods do not work for tech stocks. There is a concept of disruptive technology where new technology can break the market of an already established player. It happened with BlackBerry back in 2009, when Apple launched its iPhone and changed the way mobile devices work. BlackBerry, which once owned 50% of North America’s mobile device market, exited the hardware market by 2014.  

Shopify is still behind Amazon in many aspects, such as global outreach, last-mile deliveries, and customer popularity. Unlike Apple, Shopify does not have disruptive technology. But it has the potential to be the second best in the e-commerce space. Shopify is building its ecosystem of end-to-end retail solutions for both online and physical stores. It has the potential to replicate Amazon’s success in the coming decade. But investors have already priced the stock for the next 10 years. 

Shopify is a good growth stock, but its inflated stock price bubble could burst if it fails to meet investors’ expectations. If you haven’t bought the stock yet,  just wait and watch. The stock could move in the strong double digits after its second-quarter earnings are released in early August.

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