Online Business News

Via online business online marketing online business opportunities Shopify: Solid Business, Overvalued And Misguided

Thesis Summary We believe that Shopify (SHOP) stock is overvalued, and we expect the market to correct for this shortly. We believe the company to be overvalued because: There is evidence management thinks the stock is overvalued and is using this opportunity to finance its operations and investments through stock issuance. There is evidence of…

Traffic Exchange

Via online business online marketing online business opportunities

Contents hide

Via online business online marketing online business opportunities Thesis Summary

We believe that Shopify (SHOP) stock is overvalued, and we expect the market to correct for this shortly. We believe the company to be overvalued because:

  1. There is evidence management thinks the stock is overvalued and is using this opportunity to finance its operations and investments through stock issuance. There is evidence of this all over the balance sheet.
  2. Fundamentally, the company’s growth is slowing down and it is trading at incredibly high ratios, even for a tech stock.

Having said this, we also think Shopify’s core business has the potential to be profitable. To prove this, we will value the company by forecasting its trajectory based on its current performance and projecting potential future profitability to determine a target price. To this extent, Shopify should focus on improving its core business rather than expanding its operations, which seems to be what it is trying.

Our analysis will serve to support our thesis that there is value in the company’s core business, as it is capable of generating sustained profits. At the right price, Shopify will be a great buy.

Via online business online marketing online business opportunities Shopify is more than SaaS

Founded in 2004, Shopify has made a name for itself as a revolutionary “ground-breaking” tech stock. It is the Cinderella story of a small Canadian company poised to take over the eCommerce world. This is the kind of company that creates fanaticism and hardcore believers, which is part of the reason it has enjoyed such hefty valuations.

Shopify offers a web service that allows its customers to easily and inexpensively set up an e-commerce page. You can visit its site, purchase a basic Shopify plan for $79 a month, a domain and voila! Within minutes, you can have your page set up. The company offers a variety of free or paid “themes” (website templates). You can choose the design and “look” for your store.

In the back-end, you have a rudimentary control panel to manage your products, set prices, control stock, etc.

Clickbank Marketing Tools

On top of this, for any additional functionality, you may visit the Shopify App Store, where the company itself or individual developers or companies offer apps (software) that integrate with the store.

Furthermore, the company offers Shopify Payments to facilitate payments, taking a transaction fee from every sale, Shopify POS for physical stores and even Shopify Capital to help merchants fund their activities at, if I may add, exorbitant interest rates.

It would be an understatement to say that, from start to finish, the company exploits every single possible way to: 1) extract money from its users and 2) increase their dependency on Shopify. This is a double-edged sword. As someone who has worked in the industry, I have encountered much frustration in this area. For example, Shopify charges a fee for using any third-party payment processing system, such as Stripe, virtually making its system, Shopify Payments, the most affordable option. The funny thing is, Shopify Payments is powered by the same technology as Stripe. Shopify isn’t adding any value here more than penalizing you for opting out of its system.

Having said this, Shopify is trying to be more than SaaS, and that is commendable and does have the potential for value creation. The company offers a complete service and incredible support. Its team of “Shopify gurus” is available round the clock by chat or phone to help users with any problems and questions.

Furthermore, as previously mentioned, it offers financing, payment solutions (online and physical), technological solutions (a community of vetted and rated “Shopify experts”) and a plethora of instructional content on everything eCommerce.

The company has plenty of room to grow in its sector and market, which is why I believe the latest move to enter the fulfillment business would be detrimental to its bottom line

Via online business online marketing online business opportunities Sources of Revenue

Shopify’s main source of income is recurring subscription payment. This accounts for around 80% of revenues.

In this department, the company has the following offers:

  • Shopify Lite: $7/month. Enables users to sell on social media channels like FB and Instagram.
  • Shopify Basic: $39/month. Enables use of Shopify functions with limited functionalities.
  • Shopify: $79/month. Full Shopify platform and reduced transaction costs.
  • Shopify Advanced: $299/month. Further reduced transaction fees and extended analytics.
  • Shopify Plus: Starting at $2000 month: An enterprise-level solution that offers various instances of the platform, B2B capabilities and dedicated technical and business support.

The rest of the revenues can be attributed to “merchant solution”. This is money people pay for all the additional services Shopify offers.

These include:

  • Shopify “Apps”
  • Shopify Payments
  • Shopify Capital
  • Shopify POS hardware

In this regard, it is interesting to analyze the difference between these sources of income.

Source: Q3 report

As we can see, in terms of total revenue, subscription solutions represented a little over 1/3rd of revenues. Quite a striking difference from 2018, where the distribution was a lot closer to 50/50. This shows us that merchant solutions is growing at a much faster rate than Shopify. Is this good or bad?

Further analysis verifies that subscriptions represent a much higher percentage of gross profit, or in other words, have a much lower cost of revenue and, therefore, higher profit margin.

In 2019 Q3, subscription revenues represented 80% of gross profit.

Source: “Shopify: Do Not Stay Passive,” Seeking Alpha

Therefore, it is quite reasonable to conclude that:

  1. Revenue growth will slow down, with subscription solutions growing at slower rates and facing some upcoming challenges (proliferation of dropshippers).
  2. Profit margins will be reduced, as merchant solutions, which have a much higher operating costs, become a larger part of revenues.

Via online business online marketing online business opportunities Sources of expenses

The software aspect of the company itself is not expensive. To this extent, Shopify’s business model shouldn’t carry high variable costs, which should allow it to command high profits margins on its operations.

Here we can see revenues and expense growth.

Source: YCharts

As we can see, revenues have grown in lockstep with expenses. This is because, as a growth company, Shopify increases its expenses deliberately to seek growth. However, as the company matures, we could expect Shopify to easily be able to reduce expenses.

Now, let’s have a look at how these expenses are broken down:

Source: Q3 report

Shopify spends almost 1/2 of its operating income on sales and marketing. The company does this mostly through affiliate marketing and what it labels its “partner program,” which allows partners to receive a recurring income from referrals.

The company is dependent on this marketing expenditure to maintain subscription growth, and it is hard to see a scenario where it could reduce this significantly without damaging top line growth.

The remaining operating expenditures are roughly 1/3rd R&D, with the rest attributed to GA. In the near future, if Shopify wanted to increase profitability, a strong argument could be made for a reduction in R&D.

Via online business online marketing online business opportunities The Market

Shopify operates within the growing world of eCommerce. It is undeniable that this sector is poised to grow at a rate calculated by some analysts of around 4.6% in 2020.


Furthermore, the company is in the SaaS business, which is also one of the highest-growth spaces to be in. Investors and entrepreneurs alike have accepted for the past few years that this is a business with the potential to create value and save companies millions, even billions.

With the advent of AI, SaaS will soon be able to replace a very significant part of the workforce – accounting, sales and even marketing.

In terms of eCommerce, the company needs to expand on its technology to help deliver value and stay ahead of the competition.

Shopify needs to be more than a platform. It needs to be an automated employee capable of running data analytics and implementing sales, marketing, and overall growth strategies. This is where the money is.

Via online business online marketing online business opportunities Shopify’s clients

Shopify users can range from small physical stores that are getting started with eCommerce to large multinationals spending over $2000/month on Shopify Plus services.

Although the company won’t disclose exact information on this, it is suspected that a large chunk of users are “dropshippers.” These are individuals who are, in essence, “reselling” goods on the internet by listing products found on “cheap” marketplaces like AliExpress and listing them and rebranding them on their store.

This poses an interesting question as to the sustainability of Shopify’s customer base, which we will explore further on. Dropshipping does not provide value, since it just takes advantage of people’s ignorance. It has been hailed in the past few years as a get-rich easy scheme and what not. Shopify is encouraging this, as it owns and operates Oberlo, a Shopify “app” which helps automate the fulfillment process for dropshippers.

The situation is akin to that of the gold fever in California, and Shopify is the one selling the shovels. But how long will it be able to continue to do so, as less and less gold is left?

Via online business online marketing online business opportunities Competition

Shopify competes directly with other eCommerce software such as WordPress’s WooCommerce and BigCommerce. It also competes with marketplaces like Amazon (AMZN), Facebook (FB) and Instagram, where people can also essentially sell their products. However, these sales channels can also work in conjunction with Shopify allowing its users to easily sell their products on other channels, such as the ones mentioned above.

In this way, Shopify tries to set itself up as a center of operations for eCommerce businesses.

Nonetheless, the eCommerce industry is getting crowded. As an example, Mailchimp, an email provider, earlier this year decided to stop working with Shopify to pursue its own eCommerce business. Facebook will be expanding into this realm, as social media becomes a platform for eCommerce in itself.

Via online business online marketing online business opportunities Mergers & Acquisitions

Since its inception in November 2011, Shopify has acquired a few different companies. In chronological during the last 4 years, these include:

  • Boltmade
  • Return Magic
  • Tictail
  • Handshake
  • 6 River Systems

The last acquisition, 6 River Systems, came at a steep price, paid out 50/50 in cash and equity. The company acquired is in the fulfillment industry, focusing on automated solutions using advanced robotics and AI. While the technology seems promising, we believe that this move by Shopify will not pay out.

The fulfillment industry is crowded, and Shopify can’t compete in size or price with Amazon, which is losing money on its shipping. Furthermore, margins in this business are small, and if we are to believe that most Shopify users are dropshippers, there’s no advantage the company can offer in this sector.

Via online business online marketing online business opportunities Mispricing

As stated in the thesis summary, there are two clear reasons which lead us to believe that the company is overvalued.

1) Funding through equity

Data source: Seeking Alpha

Shopify has been funding its activity through stock offerings since its inception. Not only this, but the company has also greatly increased stock compensations and has also used stock exchanges to pay for part of its mergers & acquisitions.

Data source: Seeking Alpha

As recently as September 16, 2019, Shopify raised around 600 million, offering 1.9 million class A subordinate voting shares at $317.50. The thing is, it is unclear why exactly the company has done this. Yes, part of it was raised to fund the acquisition of 6 Rivers, allegedly, but Shopify now holds 2.3 billion in cash and ST investments.

It’s likely, that this money will go towards expanding its new fulfillment operations. In any case, it seems quite clear that management is cashing in on the hefty valuation that the company currently has, after appreciating over 140% in the last year.

2) High valuation ratios

Looking at a comparative analysis between Shopify and its peers, it is quite clear that Shopify trades at higher than normal ratios, even for a tech stock.







EV/Sales (TTM)







Price/Sales (TTM)







PEG Non-GAAP (Fwd.)





However, despite high PEG and PES, if we look at growth and profitability ratios, the stock doesn’t stand out.







Revenue Growth (YoY)







Gross Profit Margin







EBIT Margin







Of course, the above valuation ratios looked quite different one year ago, with Shopify’s stock price at ~$150.

Via online business online marketing online business opportunities The good and the bad (Qualitative analysis)

Our extensive analysis of Shopify has led us to conclude the following. In terms of strong points and opportunities, the company has:

  • Outstanding growth
  • High profit margins
  • A strong balance sheet
  • Customer loyalty

Shopify is in a sweet moment. It’s in an interesting and growing industry. Ecommerce brings together the best of traditional retail and technology. In other words, this is not some technology that may or may not be profitable in the future. Ecommerce is here to stay and to create value and profits.

To this extent, Shopify is well-positioned to provide value to its customer base. We believe the company should focus on retaining and maximizing profits from its existing customers and, especially, big multinationals. To do this, it must focus on its core business and adding value to merchants, rather than increasing subscriptions.

On the other hand, Shopify faces the following weaknesses and threats:

  • Steep competition from larger companies
  • Crowded market
  • Slowing growth
  • Decreasing margins
  • Not much of a competitive advantage

One of our biggest concerns is the rate of “churn” of its customer base. While we don’t have exact numbers on this, it is quite evident that a high proportion of Shopify users are dropshippers or new entrepreneurs. Not that there is any problem with this, but dropshipping doesn’t add value, and 9/10 businesses fail. This means subscription revenue will decrease, which will also affect profit margins.

At the same time, Shopify is facing competition from giants like FB and Amazon. While Shopify is an established brand and name, its software is easy to replicate and doesn’t offer many advantages.

Via online business online marketing online business opportunities Valuation

Our valuation of the stock is based on the profitability of Shopify’s current core business. Our model is limited to forecasting the profitability of the company based on what it is/has right now.

Given the above qualitative analysis, we believe that Shopify is in a position to continue growing and generate substantial FCF.

Therefore, our valuation will serve to justify our thesis that there is plenty of value to the company, which is why it should focus on its core business and expanding profitability, instead of expanding aggressively to other markets through mergers and acquisitions.

Via online business online marketing online business opportunities Quantitative analysis

Now we are going to attempt to find a value for Shopify’s core business, assuming a scenario where we cut R&D spending, which we have established to be mainly focused on penetrating markets outside the company’s core business. As a consequence, we assume the core business does not require any further issuance of equity or debt, and excess cash, as well as current short-term investments, are treated as free cash flows. We will forecast revenue growth and product cost with some attention to the evolution of the two main business sections defined in the latest Shopify 6-K report. Ultimately, the valuation is based on the present value of perpetual and growing free cash flows. All assumptions are specified below.

Via online business online marketing online business opportunities Revenue

First of all, we assess revenue growth. It appears that revenue growth is very high but logically slowing down as the business grows. Revenue for 2019 is estimated by taking the year-to-year growth rate in 2019 Q3 and applying the same rate to 2019 Q4. This leaves us with an estimated revenue of just over 1.55 billion and 44.61% growth. We can take all available growth rates from 2012 to our 2019 estimate and create an exponential trend line on a spreadsheet. Then, we can use the function of the trend line to forecast revenue for the next few years. We will assume that growth will increase until it hits a long-term industry level, which we estimate at 4.6%, based on the forecast for e-commerce growth seen earlier from eMarketer, and then remain constant. In our model, this would happen in 2035.

Source: Author’s estimates

Via online business online marketing online business opportunities Cost of revenue

In terms of product cost, we mentioned earlier that there are two lines of business with different growth and product cost – a subscription services business with 20.1% cost of revenue and 38% growth, and a merchant services line with 50% revenue growth and a 62.5% revenue cost (based on the latest quarterly report). We can calculate the proportion of overall growth that each line represents and keep that constant over time to estimate the product cost going forward, and we can see that it grows over time to an almost stable 46.5% of revenue by 2035. We will assume it keeps that percentage going forward.

Via online business online marketing online business opportunities Other assumptions

– SG&A expenses seem to be moving towards 40% of revenue, so we will keep them at that level.

– R&D costs will be frozen at $310 million until 2035, from which point they will grow at the same rate as revenue.

– Interest gains from short-term investments will be eliminated, as excess cash is being treated as a free cash flow year by year.

– There will be no further equity-based compensation or issuing of equity, since there is no need for it.

– Income tax is a fixed 21% of net income.

– Working capital and fixed assets grow at the same rate as revenues.

– Other minor expenses grow at the same rate as revenues.

These assumptions are designed to create an eventually fixed growth rate for net income and free cash flow (from 2035), while remaining reasonable estimates of how the business might evolve if it follows its natural course in a growing market. As established before, we have assumed that growth plateaus at 4.6%, which is the estimated growth rate of eCommerce according to eMarketer research.






Net income






Change in WC












Free Cash Flow






FCF growth






Source: Author’s estimates

The present value of all future free cash flows in this model can be seen on the following table, for a variety of required rates of return (values are discounted to December 2019):

Rate of return








Value ($MM)








Shares outstanding








Target share price ($)








Source: Author’s estimates

Via online business online marketing online business opportunities Conclusion

Our forecast concludes that at the current price of ~$319, the expected rate of return should be somewhere along 6.0%. The S&P rate of return over the last 3 decades is over 9%, but correcting for risk-free rates, we believe a current market expected return is more along the lines of 8%, so the value of Shopify’s core business according to these calculations is closer to $100.

Having valued Shopify for what it is, rather than what it can be, it is quite evident that anyone who is investing at current prices must have some very optimistic hopes about what the company can achieve.

We believe the qualitative analysis has proven that there is indeed no fundamental reason why we should believe Shopify can maintain double-digit growth figures in the medium to long term.

While the growth assumptions we have used may be conservative, it is clear that Shopify is operating in an increasingly crowded market, and any expansion into other areas will come at great cost to profitability, even if higher growth can be achieved.

Shopify has done a great job of marketing itself as cutting-edge and revolutionary, and this has served the company well in the eyes of both consumers and investors. However, we believe in the long term, hopefully sooner rather than later, Shopify will realize that it is not going to be the next Amazon. At that point, profitability will become the true measure of its potential and the company valuation will reflect this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Read More

Leave a Reply

Your email address will not be published.