Shopify Stock: Difficult Outlook As User Growth Slows (NYSE:SHOP)

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On this evaluation of Shopify Inc. (NYSE:SHOP), we examined the corporate because it released its quarterly earnings in July, which showed a slowdown in revenue growth to simply 15% in comparison with its 5-year average of 64%. Furthermore, excluding 2020, its 5-year average growth was 59% in comparison with a 9-year average of 81%. We looked into the corporate’s user, gross merchandise value (GMV), and take rate growth.

Slowing Users Growth From Average Of fifty%

Shopify

2016

2017

2018

2019

2020

2021

Average

Users (‘mln’)

0.38

0.61

0.82

1.00

1.75

2.06

Growth %

88.75%

61.32%

34.65%

21.95%

74.90%

17.95%

49.92%

Revenue ($ mln)

389.30

673.30

1,073

1,578

2,930

4,612

Growth %

89.72%

72.95%

59.39%

47.06%

85.62%

57.43%

68.70%

Source: Shopify, Khaveen Investments

By way of user growth, the corporate’s user base had expanded significantly prior to now 6 years from 0.38 mln to 2.06 mln in 2021 with a mean of 49.9%. Nevertheless, except in 2020 through the pandemic, its growth rate had been decreasing prior to now 6 years. In response to Etail Insights, there are 5.9 mln, online merchants globally selling on their very own website or a shopping cart platform.

Based on this figure, Shopify has achieved a 34.9% market share with its 2021 users (2.06 mln).

Company

Users (‘mln’)

Revenue ($ mln)

Market Share

Reviews

Shopify

2.06

5,003

34.97%

4.3

BigCommerce (BIGC)

0.06

182.9

1.02%

4.2

Wix (WIX)

0.425

1,311

7.20%

4.2

Squarespace (SQSP)

0.969

812.2

16.42%

4.4

Contentful

0.4

58.4

6.78%

4.3

Source: Company Data, Tooltester, Datanyze, G2, Khaveen Investments

We then compared Shopify with its peers by way of users, revenue, and market share and reviews (G2). As shown within the table, Shopify leads with the very best numbers of users, revenue, and market share. In contrast, Big Commerce has the smallest variety of users with a 1.02% market share, whereas Contentful has the bottom revenue. Nevertheless, by way of reviews by G2 which incorporates criteria resembling ease of use, quality of support and ease of setup, Shopify is tied at second place with Contentful and trails behind Squarespace with the very best reviews. Moreover, Wix and BigCommerce have only barely lower than Shopify. Thus, we imagine that although Shopify had established its market leadership with the very best users and market share, its reviews are just like its competitors which indicates the high competitiveness of its competitors, and we imagine Shopify’s ability to further grow its user base could possibly be challenged by strong competition.

Sales Volume Per User Growth Not Enough To Offset User Slowdown

Shopify

2016

2017

2018

2019

2020

2021

Average

GMV per user ($)

40,795

43,186

50,122

61,100

68,382

85,022

Growth %

6.93%

5.86%

16.06%

21.90%

11.92%

24.33%

14.50%

GMV ($ bln)

15.40

26.30

41.10

61.10

119.60

175.40

Growth %

101.83%

70.78%

56.27%

48.66%

95.74%

46.66%

69.99%

Revenue ($ mln)

389.30

673.30

1,073

1,578

2,930

4,612

Growth %

89.72%

72.95%

59.39%

47.06%

85.62%

57.43%

68.70%

Source: Shopify, Khaveen Investments

Furthermore, by way of the corporate’s GMV per user growth, its growth had accelerated prior to now 5 years except in 2020 which coincides with the surge in recent users on the platform. In 2021, as user growth continued to slow, its GMV per user growth (24.3%) was higher than its user growth (17.95%) for the 12 months, showing that the user growth is decelerating faster than the GMV per user growth increase. The corporate partnered with Google (GOOG) and Facebook (META) in 2021 for Shop Pay, which enables merchants selling on Facebook and Google to make use of its payment checkout service and integration with its Shop mobile app for order tracking. Recently, the corporate also expanded its partnership with Google this 12 months with the launch of YouTube Shopping and partnered with Twitter (TWTR) for Twitter Shopping. Through the partnership, Shopify’s merchant can mechanically sync their product catalog. Subsequently, we imagine this may benefit Shopify by increasing its merchants’ GMV per user because the partnership increases the merchant’s reach to more customers.

Overall, despite the expansion in GMV per user, its slowdown in user growth had been faster than the rise of its GMV per user growth. Thus, we imagine that its GMV per user growth is unable to support the corporate’s total growth.

Flattish Take Rate Growth

Shopify

2016

2017

2018

2019

2020

2021

Average

GMV ($ bln)

15.40

26.30

41.10

61.10

119.60

175.40

Growth %

101.83%

70.78%

56.27%

48.66%

95.74%

46.66%

69.99%

Take Rate

2.5%

2.6%

2.6%

2.6%

2.4%

2.6%

Growth %

-6.00%

1.27%

2.00%

-1.08%

-5.17%

7.35%

-0.27%

Revenue ($ mln)

389.30

673.30

1,073

1,578

2,930

4,612

Growth %

89.72%

72.95%

59.39%

47.06%

85.62%

57.43%

68.70%

Source: Shopify, Khaveen Investments

Lastly, we examined the corporate’s take rate of its GMV, which had remained flat prior to now 6 years with a mean growth rate of -0.27% which had a negative impact on its revenue growth. Moreover, we compared the corporate’s payment processing fee with its competitors to find out its competitiveness within the table below.

Company

Fee ($)

Shopify

2.4% to 2.9% +$ 0.30

BigCommerce

2.59%

Wix

2.90%

Squarespace

3%

Contentful

Source: Company Data, Khaveen Investments

As shown above, Shopify’s transaction fee has a spread of between 2.4% to 2.9% per transaction for the variable fee depending on the plan offered. Its top end of the fee range is tied with Wix because the second highest at 2.9%, behind Squarespace which has the very best fee at 3%. Tough, Shopify also charges a hard and fast fee of 30 cents per transaction on top of the variable fee. We imagine this means the highly competitive pressures on the fees that are fairly similar for all firms above, which is a negative for Shopify’s take rate which had been flat prior to now 6 years.

Risk: Partnerships Not Exclusive

Through partnerships resembling with Google Shopping and Twitter Shopping, we imagine Shopify’s merchant reach could possibly be increased. Nevertheless, we imagine Shopify’s partnerships is probably not exclusive to the corporate and its partners could resolve to partner with Shopify’s competitors in the long run. For instance, BigCommerce could be integrated with YouTube. If Shopify’s partners resolve to enter similar partnerships with its competitors, we imagine this will jeopardize the advantages it brings to Shopify as a consequence of higher competition.

Verdict

Shopify ($ mln)

2022F

2023F

2024F

2025F

2026F

Users (‘mln’)

2.29

2.51

2.73

2.95

3.18

Growth %

10.80%

9.75%

8.88%

8.16%

7.54%

GMV per user ($)

85,175

97,967

111,700

126,241

141,413

Growth %

0.18%

15.02%

14.02%

13.02%

12.02%

GMV ($ bln)

194.7

245.8

305.1

372.9

449.3

Growth %

11.00%

26.23%

24.14%

22.24%

20.47%

Take Rate

2.6%

2.7%

2.7%

2.7%

2.7%

Growth %

0.71%

0.71%

0.71%

0.71%

0.71%

Revenue ($ mln)

5,155

6,553

8,193

10,086

12,236

Growth %

11.78%

27.12%

25.02%

23.10%

21.32%

Source: Khaveen Investments

To conclude, we determined that Shopify’s growth slowdown was as a consequence of the corporate’s slowing user growth, which we imagine could possibly be difficult with strong competition. Despite the accelerating GMV per user growth, its total growth still slowed down as its user growth slowed faster than its GMV per user growth. By way of its take rate which had been flattish, we imagine its ability to lift its take rate is also difficult as its competitors have similar fees. As seen within the table above, we projected its revenue growth based on user increase, GMV per user and take rate growth based on its 6-year average (excluding 2020 as a consequence of the surge through the pandemic) but tapered down by 1% for GMV per as a conservative estimate. In 2022, we forecasted its GMV to grow by only 11% based on its Q2 YoY growth. The analyst consensus price goal of $41.08 represents an upside of only 3.8%.

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