Shopify Inc.
NYSE: SHOP
COMPANY DESCRIPTION
Shopify,
Inc. operates a cloud-based commerce platform designed for small and
medium-sized businesses. Its software is used by merchants to run business
across all sales channels, including web, tablet and mobile storefronts, social
media storefronts, and brick-and-mortar and pop-up shops.
The
company's platform provides merchants with a single view of business and
customers and enables them to manage products and inventory, process orders and
payments, build customer relationships and leverage analytics and reporting. It
focuses on merchant and subscription solutions.
Shopify
was founded by Tobias Albin Lütke, Daniel Weinand and Scott Lake on September
28, 2004 and is headquartered in Ontario, Canada.
RECOMMENDATION
We rate Shopify Inc. a BUY at the price value of US$ 133. Below are the basic
reasons to recommend this stock as a BUY.
·
According to National Retail Federation (NRF)
online retail sales will grow 10–12%, three times faster as compared with
brick-and-mortar retail sales growth projection of 3.8-4.4% in 2017. Market
research firm eMarketer estimates global retail eCommerce sales (excluding
travel, restaurant and event ticket sales) reached $2.304 trillion in 2017,
accounting for 10.2% of total retail spending worldwide. This will further
increase to $4.058 trillion by 2020, which will make up 14.6% of total retail
spending. We believe that the massive growth in eCommerce spending bodes well
for Shopify. The company’s cloud-based platform is well-positioned to address
the growing needs of merchants at a time when social media, cloud computing,
mobile devices and data analytics are transforming the eCommerce market place.
·
Shopify’s biggest USP lies in the fact that it
is a brand-oriented platform as compared with an online marketplace. Here, the
brand hogs the limelight, which helps the merchant win customer much faster
through focused interaction. The platform helps in improving customer’s brand
loyalty, which drives merchant revenues. Further, we note that Shopify hosts a
huge database of merchant and customer interactions. Merchants leverage this
transactional dataset to get meaningful insight into the sales channel growth
prospects and consumer behavioral aspects. This improves their ability to
target prospective customers more easily, which drives sales growth. Management
noted that merchants on average became more successful on Shopify, as GMV per
merchant grew by more than 20% over 2017. The company’s plan to invest on
leveraging this transactional data will further enhance merchant’s ability to
attract customers going ahead. We believe that the company’s merchant focus
strategy will aid it to dominate the SMB eCommerce market in the long run.
·
Moreover, the company continues to add
functionality to its platform, which is responsible for driving merchant base.
The launch of Shopify Payments, Shipping and Capital have made it easier for
merchants to process payments, ship products and secure financing for their
working capital needs, respectively. Notably, the percentage of merchants using
Shopify Payments grew every quarter throughout 2017. Moreover, merchant
adoption of Shopify shipping continues to expand in both the U.S. and Canada.
Management anticipates this trend to continue as the company expands shipping
partners and add new features. We believe that its merchant focus business
model will help it to achieve its growth target in the long haul.
·
Notably, more than 231.5K net new merchants
began selling on Shopify during 2017. We expect this number to improve as newly
added sales channels like Google Pay, Facebook Messenger and Amazon continues
to attract new merchants. Shopify noted that the addition of Houzz, Wanelo,
eBates and others has driven the number of channels over which a merchant can
sell to more than a dozen. The company also noted that merchants are buying
more apps through app store, which is positive. Shopify app store currently
offers more than 2300 apps. Moreover, availability of Apple Pay and addition of
Canada Post are some other notable developments that will boost merchant base.
Further, Shopify noted that by 2017 end, more than 150K merchants had elected
to offer Apple Pay as a means for checkout. These merchants saw conversion
rates approximately double by shoppers who use Apple Pay. We also believe that
the company’s strong partner referral system will boost merchant base that will
eventually drive top-line growth in 2018.
·
Shopify has a rich partner ecosystem, which is a
growth driver. We note that number of total partners increased almost 4K on a
year-over-year basis to 15K at the end of fourth-quarter 2017. The agency
partner program established in 2016 drove Shopify Plus subscription base.
Shopify noted that the Monthly Recurring Revenue (MRR) per merchant surged 62%
to $29.9 million at the end of fourth-quarter fiscal 2017, primarily due to
strong growth in Shopify Plus subscription base. The company’s plan to offer
variable pricing structure under Shopify Plus is also prudent move, in our
view.
·
Mobile focus provides significant leverage to
Shopify. The company launched its iPhone-based Shopify Mobile application way
back in 2010. Mobile traffic to merchants’ stores continued to grow, reaching
75% of traffic and garnered 64% of orders for the quarter ended Mar 31, 2018,
up from 69% and 59%, respectively, reported in the year-ago quarter. We note
that the company is benefiting from retail’s rapid transition to mobile and
social sales channels. Shopify has stated that merchants’ shops averaged 218
million unique monthly visitors, most of which were from mobile devices in
2017. Per market research firm comScore, during 2017 holiday season (Nov-Dec),
mobile commerce grew 44% from the year-ago period, with $17.1 billion spent
through smartphones and tablets. Per eMarketer, M-commerce sales are projected
to grow 32.7% in 2018. We believe that this rapid growth presents significant
opportunities for Shopify in the long term.
LAST EARNINGS
Shopify Inc. delivered 2018
non-GAAP earnings of 4 cents per share much better than year-ago quarter’s loss
of 4 cents. Moreover, earnings beat the Consensus Estimate by 9 cents.
Revenues surged 68.3% from the
year-ago quarter to $214.3 million, comfortably surpassing the Consensus
Estimate of $201.6 million. The figure was also better than the guided range of
$198-$202 million.
Shopify continues to launch several
merchant-friendly applications to meet the requirements of a dynamic retail
environment, consequently adding to its merchant base. Top-line growth
benefited from an expanding merchant base.
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