🚀A potential compounder: Shopify 🛍️🛒 (November 2022)

I take a longer-term perspective by looking at their years of financial performance and accompanying financial metrics. There is a lot of information publicly available about these companies, detailed quarter-to-quarter analysis and strategies discussion that I do not want to replicate.

Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.

Many investors would associate Shopify as an e-commerce service provider, especially with the huge spike in revenue and profits as well as its share price during Covid in 2020 and 2021.

Shopify’s mission is to make commerce better for everyone; making commerce independent. It aims to be the commerce operating system; direct to consumers without intermediaries. It helps merchants to start, manage and grow their businesses easier and simpler. It offers retail solutions, capital, logistics and advertising. It caters for entrepreneurs, SMBs and larger brand owners such as Netflix, Heinz, LeSportsac, Staples and Allbirds.

Shopify investor overview Q3 2022

Also, many will compare Amazon to Shopify. Shopify’s CEO Tobi Lütke described Amazon as trying to build an empire and Shopify as trying to arm the rebels. Some described Shopify’s strategy as running a Warcraft strategy which Tobi Lütke is a big fan of. Shopify has turned independent e-commerce sites into online retail swarms capable of taking on much bigger players. The Shopify ecosystem makes it very easy for entrepreneurs to “spawn” sites and gives them the tools to be nimble and competitive online.

Shopify: A StarCraft-Inspired Business Strategy – a good insight into Tobi Lütke and Shopify

In addition, there are thousands of apps in the Shopify App Store to extend the functionality of their online retail. Whether it is to add customer reviews, improve email marketing, publish products to Facebook, or get in-depth analytics, there is an app for that; making Shopify more useful and stickier.

App developers, design agencies, and theme designers have built businesses by creating value for merchants on the Shopify platform. Thus, the ecosystem is constantly enlarging its ecosystem by Shopify itself and its various stakeholders.

Fun fact: Shopify had launched its own esports organization and Starcraft 2 team, Shopify Rebellion.

Shopify investor overview Q3 2022

Shopify’s pandemic boom was unprecedented. Its revenue grew by 85% in 2020 and 57% in 2021. Its revenue growth rate deaccelerated in 2022 hitting its lowest growth rate of 15% in Q2 2022. Even before Covid, its revenue CAGR between 2013 to 2019 was 63%; deaccelerating to 47% in 2019. Its GMV growth has been outperforming the broader U.S. retail market. Its gross profit margin has decreased with changes in its service offerings mix. Aggressive investing has caused its operating profit to plunge into losses. It acquired Deliverr for $2.1b in 2022 to have fast and easy fulfilment.

Shopify: Shopify x Deliverr

Shopify’s quarterly revenue, gross profit and operating profit

Shopify’s quarterly revenue and gross profit year-on-year growth

It is not easy competing against the bigger and more aggressive Amazon and succeeding in the long run. The Exhibit below shows the strength and resilience of Shopify against Amazon and demonstrates the viability of direct-to-consumer retail.

E-commerce sale is expected to grow in absolute terms as well as a percentage of total retail sales which is expected to continue to grow. Covid accelerated the shift towards online out of necessity for many merchants and shoppers. Post-Covid, it will not return back to pre-Covid; shopping habits developed will not change back — many will continue to shop online.

Source: US Census Bureau

Despite the huge drop from the peak, Shopify’s returns to investors since its IPO in May 2015 is 43%. Its valuation hit a crazy high during 2020 and 2021.

Online presence: Own store versus e-commerce platforms

E-commerce platforms (Amazon, Etsy)
The objective of the top e-commerce platforms is to make their platform the first-stop, one-stop and full-stop platform for a specific product category or general shopping. They will market and promote very aggressively to attract customers and merchants and improve platform services with logistics, and members’ benefits (Amazon Prime). While the platforms can attract lots of shoppers, it attracts more merchants and competition intensifies. Search results can generate a long list of merchants offering a wide variety of items. To give good value to customers, the platform will offer suggestions, comparisons and recommendations to narrow our search for better and cheaper products. Merchants can advertise and sponsor for greater visibility and be ranked top in search results. Some merchants make lots of money on Amazon.

CNBC: Here’s How To Get Rich Selling Stuff On Amazon

With data analytics, the platform will know what is lacking and will want to attract merchants and items to improve its variety. Platforms like Amazon offer cheaper in-house brands and products that can compete with its merchants. More and cheaper variety of products is good for customers but bad for merchants.

CNBC: The Big, Secretive Business Of Amazon’s 100+ Private-Label Brands

Platforms as a whole have more leverage than any one of its merchants. The latter has little or no control over the platform. Worse, merchants may risk being investigated, suspended, and delisted by the platform.

With Shopify, merchants build their own online presence and branding with full autonomy using the tools and services that they have. The merchants can personalise the site to their needs such as subscription service offerings, and site language translation. Customers will not know it is powered by Shopify. The site is all up to merchants to build and promote.

Shopify investor overview Q3 2022


Some retailers started online and expand into physical sales while others may start with a physical store along with an online presence (omnichannel). Business functions such as inventory, payment, and accounting must serve the merchants well for their overall business seamlessly and productively both online and offline (i.e. omnichannel capabilities). Imagine inventory management where the online store knows exactly what models, colours and sizes are available and does not oversell. When physical stores are opened for business, the merchant must have up-to-date inventory records. The same applies to payments and other business functions.

The company is starting to get traction in the offline commerce market. Shopify’s point-of-sale software solution, while still contributing a small portion of overall GMV, enjoyed 41% GMV expansion year over year in Q3 2022, in constant currency terms. During the quarter, Shopify launched its handheld, “all-in-one mobile POS device,” dubbed POS Go, which should further increase its penetration in offline commerce.

Reference: Shopify’s price plans

Shopify’s competitors

There are many competitors that help merchants to create e-commerce sites. Other than Shopify, there are Wix, WooCommerce and Squarespace.

Comparing using GMV and if all Shopify merchants were one retailer, Shopify would be the third-largest in the U.S. with a roughly 10% market share.

Source: Marketplace Pulse

Comparing the two exhibits above, Shopify may not have the larger market share in terms of e-commerce sites, but those using Shopify tend to be more serious merchants as evidenced in their GMV.

There are three US-listed competing e-commerce solution platforms: BigCommerce (BIGC), Squarespace (SQSP) and Wix (WIX). They have a lower revenue with lower growth, are not profitable, have weak cash positions and some with negative free cash flow. They do not pose a threat to Shopify (for now).

Financial performances of Shopify and BigCommerce

Financial performances of Squarespace and WIX

Things to look out for

Ability to compete effectively with sustainable revenue and earnings growth
E-commerce platforms such as Amazon have been aggressive in their push for GMV. Physical retailers such as Walmart, Target, Home Depot, and Best Buy are investing aggressively to increase their online presence. In addition, as discussed earlier, there are many competitors offering competing services such as BigCommerce, WIX and Squarespace.

Shopify must be able to arm its merchants well to sell well against others. It has been investing aggressively to maintain its leadership position. In the two Gartner Magic Quadrants for Digital Commerce (August 2020 and May 2018), we can observe how Shopify has progressed vis-a-vis other players.

Like Amazon, many have been and will be sceptical of Shopify’s growth with many walls of worry to climb. Since being founded, Shopify has been building, fostering and expanding its ecosystem.  They have been and will prioritize long-term value over short-term revenue opportunities to compete and emerge stronger to become the leading commerce operating system. It has demonstrated quality, resilience and capabilities to continue riding on growing e-commerce and retail potential. We will have to continue to validate our investing thesis and its progress — GMV growth, the path to profitability and free cash flow.

2015 Letter from Tobi