Is Shopify Overvalued?

Shopify – an e-commerce platform that allows businesses to create and run online stores – has seen its stock soar by close to 10x since its 2015 IPO.  The company has two revenue streams – namely Subscriptions (which gives users access to its e-commerce platform and tools) and Merchant Services (which include payments, shipping, etc) In this analysis, we take a look at some of the key trends driving Shopify’s valuation and examine whether the stock is overvalued.

View our interactive analysis Shopify Valuation: Expensive Or Cheap? In addition, you can view more Trefis Information Technology data here.

Shopify Stock Has Returned Over 80% CAGR Since Its IPO

Shopify Trades At 23x Projected 2019 Revenues, Well Above Amazon & eBay

Shopify’s Revenue Growth Outpaces Peers

Shopify’s Gross Merchandise Values Have Grown From $8 Billion in 2015 to Over $40 B in 2018

• The GMV on Shopify’s platform has grown to ~$40 billion in 2018, which is about half of eBay’s GMV.
• Shopify’s 3-year CAGR for its GMV stands at ~75%.
• A high GMV gives the company an opportunity to expand non-subscription revenues from areas such as shipping and payments.

Shopify Is Extracting More Revenue From Its Users

Higher Revenue Per Customer

• Shopify’s average monthly revenues per customer have risen from $70 to about $110 over the last 3 years.

More High-Value Customers

• Shopify’s Plus subscription tier – targeted at larger merchants – has gained traction and accounted for 25% of its monthly subscription revenue at the end of 2018.

Higher Uptake For Services Such as Payments

• Shopify is seeing higher uptake for services such as payments and the company intends to build out its own fulfillment infrastructure.

Shopify’s Gross Margins Are Lower Compared To Amazon And eBay

• Shopify’s gross margins have stood at levels of around 55%.
• This compares to about 60% for Amazon (including AWS) and 77% for eBay.

Profitability Could Remain An Issue In The Near-To-Medium Term

Shopify Is Expanding Its Dependence On A Low Margin Business

• The merchant services business is growing much faster than subscriptions, accounting for 56% of total revenue in 2018, up from 45% in 2015.
• As this business has significantly lower gross margins compared to subscriptions, it could dilute gross margins going forward.

Shopify’s Operating Losses Are Widening

• Shopify’s loss from operations has widened, as operating expense growth outpaced gross profits.

The Bottom Line

• While Shopify has been posting robust growth in revenues and key customer metrics, we believe the company could be overvalued due to its increasing mix of low-margin merchant services revenues, high operating costs, and a decelerating revenue growth rate.