Shopify is a leading cloud-based commerce platform for SMBs. Initially focused on helping merchants design, set up and manage their online stores, Shopify has expanded to power a merchant's entire business across web, mobile, social and brick and mortar. Merchants can set up a storefront in as little as 15 minutes and get features including real-time dashboards, product/inventory management, order processing and fulfillment, payments, customer management, point-of-sale and more. Shopify also has a rich developer ecosystem that merchants can tap into consisting of app developers, theme designers and other partners.
Today, Shopify has over 160k merchants from 150 countries processing $3.8B of gross merchandise volume. Personally, I am a big fan of what Shopify is doing because I believe in technology as an enabler to human ingenuity (as opposed to a distractor). Shopify has enabled entrepeneurs to focus on what they do best without letting technology hurdles slow them down.
Merchants have typically addressed their technology needs by cobbling together various point solutions (domain registration, hosting, site design, SEO, security, payments, analytics, etc), or by using complex software built for enterprise merchants. Shopify is the one stop shop. According to AMI Partners, there are 46M merchants worldwide with less than 500 employees. In Shopify's current geographies, there are about 10M such merchants. Shopify currently generates about $1,000 in annualized revenue per merchant, implying a market opportunity of $10B, or $46B depending on which addressable merchant number that you use.
Shopify's revenue has been doubling every year, growing from $24M in 2012 to $105M in 2014. The company generates revenue primarily through monthly subscriptions ($14/mo for a starter plan), but this has increasingly been shifting to "merchant solutions" revenue, which is basically revenue from Shopify Payments:
Quarterly Revenue Composition
As a result of the increasing payments revenue, overall gross margin has been declining. Subscription gross margin is ~75%, while merchant solutions gross margin is currently at 28%. This has created a declining EBIT margin (-21% in 2014). Still, the company has demonstrated decent operating leverage with operating costs and marketing decreasing as a % of revenue. Wall Street will be watching to see whether Shopify can become a profitable business in the long run as they continue to grow their revenue with lower margin services.
Quarterly Gross Margin Composition
Key Performance Indicators
Key KPIs for Shopify include # of merchants, gross merchandise volume (GMV), monthly recurring revenue (MRR), and monthly billing retention rate. Everything has been up and to the right. Monthly billing retention shows a cohort's revenue retention over the prior month, so a number over 100% implies that growth within a cohort makes up for the churned customers.
Shopify recently priced its IPO at $17/sh, valuing the company at $1.4B equity value. The stock has traded up to ~$30, giving the company an equity value of $2.4B. Based on Wall Street projections, Shopify will do $159M of revenue this year, giving it an EV/Revenue multiple of ~14x.
Shopify is difficult to value because it is not your typical SaaS business. Although it has a SaaS subscription model, it has lower margins than a typical SaaS business and their customers are SMBs who subscribe on a monthly basis and can easily churn. The business is also not profitable (currently losing over $1m per month). Regardless, Shopify is going after a vast market, much larger than the markets of most SaaS businesses (albeit a highly competitive one).