Stock Review of the Day
Stock: SHOP (Shopify)
Summary: ON SALE
Share Price: $1,106
Sticker Price: $2,997
Is SHOP (Shopify) a good investment?
Shopify is a Canadian multinational e-commerce company headquartered in Ottawa, Ontario. They were founded in 2006 and currently have over 5,000 employees. Today, their platform is used by more than 1M businesses in 175 countries.
Based on this article on Shopify, retail commerce (physical locations) is only growing by about 4.5% per year whereas ecommerce is growing by about 18% per year.
Based on this article on BingDigital.com, here is a summary why ecommerce is growing so fast.
- Tailored Experience – Due to online browsing, advertisements for ecommerce are tailored to our exact interests. For example, if you love fishing and enjoy browsing fishing supplies online, guess what type of ads you’re going to see as you browse other websites? Exactly, fishing. This is what drives ecommerce sales!
- More Options – Typically with retail commerce, you have limited options. Inventory can run out and you may only have select colors, sizes, and specifications of products to view in person. Whereas online, you have significantly more options. This makes online shopping more attractive for the consumer.
- Social Media Integration – Social media allows consumers to read dozens of reviews within 60 seconds. The truth of a products quality is quickly revealed thanks to social media. If you want to find out if a product is good or bad, you don’t have to go far to find out.
- User Friendly – You don’t have to get in a car and drive to a physical location. With ecommerce, you can make purchases while sitting in the comfort of your own home.
- Accessibility – This is somewhat similar to user friendly but relates more to store hours. With retail, you have limited store hours such as 10am to 8pm. Whereas with ecommerce, stores are open 24/7/365. Ecommerce never closes which allows for continuous revenue generation.
Before Shopify was a thing, and you wanted an ecommerce platform to sell products online, you typically would have to build the website from scratch. You would need to find a website developer and they could either code it from scratch or develop a website with an “open source” platform such as WordPress, Joomla, or Drupal. This path can require months of work and cost tens of thousands of dollars for a small business.
With a large business, it could cost on up to millions of dollars. And the big problem aside from the time and money, these options still leave these websites filled with bugs! Ecommerce isn’t exactly easy to build. There are a lot of features and functionality such as how you navigate, how you view photos, how you pay, and how products are shipped. Overall, ecommerce is a pain in the… you know what to develop.
Shopify is considered a “closed source” platform. A quick comparison between Open Source and Closed Source… Open Source means you can edit the code and share the code with other developers. It’s typically messy and susceptible to bugs unless you have a highly experienced web developer to clean it up. Closed source on the other hand means you can’t edit the code, which is good! The platform is setup for you. Plug and play! All you have to do is login and the functionality is already there. As opposed to months of work with a custom coded open source ecommerce website, you can start selling products in minutes with a closed source platform such as Shopify.
Long story short, I used to own a company from 2006 through 2010 that built websites and provided custom software engineering services which is where my software engineering journey began. That business merged with a larger firm in 2010 and then I left the service industry. There are a few reasons why I left the service industry with the main reason being I saw SaaS was the future. Why spend months and tens of thousands of dollars when you can get a website within seconds and pay a fraction of the cost? Shopify, Wix, and Squarespace were starting to gain traction and I saw the writing on the wall.
Now let’s talk about how Shopify makes money…
Shopify is a B2B SaaS. As of 2020, their monthly plans range between $29/month on up to $299/month. Shopify also generates revenue from credit card fees, shipping fees, referral fees from partners, and POS (point-of-sale) hardware purchases.
Here is a quick 2019 revenue comparison to the competition…
Shopify = $1.58B
Wix = $1B
Squarespace = $300M
As you can see, Shopify has dwarfed the competition and it looks like this trend will continue.
Now let’s talk about some exciting news!
As of 10/13/2020, Shopify announced that Easyship, a Hong Kong based shipping app, has joined the Shopify partner program. Easyship’s shipping options include 250 companies around the world including UPS, FedEx, and DHL. The big win is, Easyship currently has 100,000 business customers. This means Shopify’s market share is about to expand.
So to answer the question is Shopify a good investment? The answer is YES. With a score of 13/20, the financials are good and with a MOS of 63% (share price of $1,106 vs a sticker price of $2,997), this stock has a some room to grow.
What do you think?
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