Shopify Analysis – February 2022

Shopify (NYSE:SHOP, TSX:SHOP.TO), an e-commerce company slid 17% Wednesday as it reported quarterly and annual results and expected slower revenue growth in 2022. The stock is down over 50% from its peak in November 2021. Is it a buying opportunity?

If you look at Shopify’s Net Income of last year, it looks pretty good. But dig deeper and it doesn’t. Most of what they attributed to it is unrealized gains in companies they either invested in and had investing arrangements with and were later brought onto the market through an initial public offering. For the year ended December 31, 2021, Affirm had unrealized gains of $1,882,974,000 (compared to December 31, 2020 it was $133,239,000). Another company Global-E had unrealized gains of $972,744,000 (for the year ended December 31, 2021). Affirm is a point of sale commerce company that also does fintech services (it has dropped from around $100 December 31st 2021 to around $43 today). Global-E is an e-commerce platform based in Israel (it has dropped from around $63 to around $36).

Shopify gets its revenues from two sources: subscription solutions and merchant solutions. Subscriptions are what people are paying a monthly/annual basis for access to a working storefront (1.342 billion in revenue for year ended December 31, 2021). Merchant solutions is credit card processing fees and currency exchange fees (3.269 billion in revenue). Out of the two subscriptions are relatively much less expensive to operate than the merchant solutions (revenue vs cost of revenue). After that operating expenses are pretty high. 901 million on sales and marketing, 854 million on R&D and 374 million on general and administrative.  All together on revenue of 4.611 billion they only have Income from Operations of 268 million, a margin of just under 6% (although an improvement from around 3% the year before) .

Shopify is also working on fulfillment centers (sort of like Amazon). “Shopify expects capital expenditures related to the fulfillment network to ramp in 2022 and for there to be approximately $1 billion in capex in 2023 and 2024, specifically for key U.S. warehouse hubs,” says Stifel analyst Scott Devitt (from Investor’s Business Daily)

Shopify has a lot of money in marketable securities that it should be spending on expanding its marketshare that is under attack from companies of all sizes. According to statista, in September 2021 Shopify had a marketshare of 29% in the e-commerce software platforms. Followed by Woocommerce (a plugin for wordpress with 23%), Wix stores (14%), Squarespace (11%), Ecwid (5%). Shopify had almost 1.9 billion in U.S. and Canadian federal bonds and agency securities with another  2.46 billion in corporate bonds and commercial paper. These investments are probably underwater right now with inflation at 7.5%.

At first I thought it might be a buying opportunity, but with a closer look it doesn’t look like a company that stores a lot of value. Shopify has been in the game for a long time, and anyone who knows anything at e-commerce has come across it. I don’t see how they can create sustainable shareholder returns in other parts of the world outside the English-speaking countries, where they specialize.

Sources: Company reports, Yahoo Finance
https://www.statista.com/statistics/950591/united-states-ecommerce-platforms-market-share/
https://www.investors.com/news/technology/shopify-stock-falls-as-q4-earnings-revenue-top-estimates/

I do not have any positions in any stocks mentioned in this article.

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