Shop ‘Til You Drop: Has Shopify Passed its Peak?

Once the cash cow of the Canadian tech industry, Shopify has recently become the dilemma on every investor’s mind. Those who bought shares during the company’s IPO in 2015 saw their investment increase by a staggering 4,300% on September 1st at the stock’s highest price to date of $1,134.34 on the New York Stock Exchange (NYSE). Unfortunately, shareholders had little time to celebrate; after a data breach by two rogue employees compromised the information of some 200 retailers in early September, the stock slid to just shy of $800 in the following weeks.

Although the stock has since ricocheted back above $1,100, many still question whether the September 1st price was Shopify’s peak.  At first glance, Shopify appears to be perfectly situated to enjoy success for years to come; after all, many consumers are growing weary of big names like Amazon, driving a shift towards local business that offers a promising future for Shopify and many up-and-coming e-commerce platforms. In addition, e-commerce is enjoying a considerable boom from COVID-19; while at first glance COVID has been favourable for e-commerce software providers, the online shopping boom has only served to intensify competition within the industry. However, due to concerns over competition and Shopify’s long-term future, the public optimism surrounding the e-commerce provider during COVID-19 is tempered by claims that it is grossly overvalued, prompting concerns about the future of the e-commerce software industry itself.

Shopify is no stranger to exponential growth; the company boasted a steady and seemingly unbridled rise to its current status. Since founder Tobias Lütke made the unusual pivot from selling snowboards to software in 2004, Shopify flourished in the market gap between IBM and Amazon. Thanks to Shopify, small businesses no longer have to spend copious amounts on unintuitive e-commerce software, nor must they sacrifice their margins to develop an online presence. Instead, they can easily create a personalized online and mobile platform while Shopify takes care of payments, processing, and shipping calculations. Shopify’s services also include brand and logo management, supplementary guides and podcasts, and more recently, even a financing program.

In addition to discreetly powering online stores for big names like Tesla, Nestle, Heinz, and Kylie Cosmetics, Shopify is the unseen hand behind over one million small businesses that span one-hundred and seventy-five countries. This subtlety is its main distinction from other platforms like Amazon; Shopify allows sellers to fully control their relationship with their customers in return for a monthly fee and a percentage of every transaction. In essence, it offers everything a business could possibly need to succeed in the world of online retail. The Shopify model is proving successful for the firm and its merchants alike, the latter of which hit $135 billion total sales on the platform overall.

Before COVID-19, Shopify had been steadily expanding; after the onset of the pandemic, however, Shopify enjoyed a record explosion in growth. With the closure of physical retail, many small and large businesses struggling to stay afloat scrambled to open up online operations. In the second quarter of 2020, the number of new stores created on Shopify’s platform rose by 71%, resulting in a 97% year-over-year increase in total revenue. In fact, the 2020 increase in revenue translated to the e-commerce giant’s first net profit since going public in 2015.

Shopify’s net losses and sky-high market capitalization of $134 billion, despite historically posting net losses, follow a longstanding trend within the tech industry. While some investors are more than happy to point to Uber, Spotify, and Lyft’s similar history of losses as evidence that profits are the cost of exponential growth, other investors are becoming increasingly skeptical of Shopify’s valuation. Some evidence supports investor skepticism about Shopify’s valuation; based on current estimates, Shopify should be facilitating five times more e-commerce sales than Amazon did in 2019 to validate its current stock price.

Beyond the case for Shopify’s overvaluation, a number of investors express uncertainty about the industry itself; while Shopify commands 11% of the market share for e-commerce software, it has become increasingly apparent that e-commerce software and logistics is an industry with limited barriers to entry. Creating a sophisticated website is not as difficult as it was in 2004, and the success of other e-commerce companies indicates that building an ecosystem like Shopify’s is also as attainable. Mirakl, a Paris-based startup that provides software capabilities to build marketplaces and online stores, recently raised $300 million in funding at a valuation of  $1.5 billion, with formidable companies like Urban Outfitters, Toyota Materials, H&M, and Siemens under its wing. 

Speculation aside, it’s fair to say that Shopify’s cult investor following might be enough to sustain it; last month, it raised $1.91 billion in a public equity offering led by Citigroup, Goldman Sachs, Credit Suisse, and co-managed by RBC Capital Markets. Securing an impressive $12 million more than anticipated, Shopify cites strengthening its balance sheet as the inspiration behind the offering, most likely in anticipation of some major strategic changes. For instance, it has committed $1 billion over the next five years to expand the Shopify Fulfilment Network. In the hopes of luring sellers away from Amazon, Shopify’s Fulfilment Network will better connect merchants to warehouse operators, route orders to the closest fulfilment centers, and indicate which items sellers should restock. This expansion will provide the merchant-customer efficiency of Amazon, while maintaining the authentic feel of shopping at a local business.

Shopify is also taking on another competitor, Clearbanc, with the recent launch of its financing program. Clearbanc is a leading e-commerce investor, having provided over $1 billion in funding to more than 3,300 online companies across North America. Shopify’s response to the fast-growing Toronto-based firm is Shopify Capital, an in-house financing program that offers merchants up to $500,000 in cash advances to be repaid by future sales.

Shopify’s biggest bid for growth yet, however, is undoubtedly its partnership with TikTok, a viral video-sharing app popular with Gen-Z and Millennial consumers. Shopify’s new partnership will permit users to shop in-video items from Shopify’s merchant network, as well as allow merchants to run marketing campaigns on TikTok that target users by gender, age, behaviour, and video category. With over 100 million users in the United States alone, Shopify’s integration with TikTok will allow merchants to reach more consumers on their platform of choice.

Much as Amazon has become a one-stop shop for customers, Shopify hopes to become a comprehensive e-commerce resource for merchants with initiatives like the Shopify Fulfilment Network and Shopify Capital. Sustained uncertainty for physical retail in COVID-19 may continue to help Shopify’s growth endure, but it is the success of Shopify’s newest logistics and financing initiatives that will determine the company’s long-term future. In the meantime, the company’s highly anticipated earnings report, set to be released on October 29th, is all there is to satisfy investors. If its stock price can survive after laying all their cards on the table, Shopify, and the rest of the e-commerce industry can relax for now – unfortunately, only time will tell whether Shopify added too much to their cart.