Shopify sign on their headquarters building in Ottawa, Ontario, Canada

JHVEPhoto/iStock Editorial via Getty Images

JHVEPhoto/iStock Editorial via Getty Images
Shares of Shopify (NYSE:SHOP) went through an unbelievable 71% drop in pricing year to date. The company, however, continues to see momentum in core products such as Shopify Payments and Shopify Capital. Shopify’s Chief Executive Officer disclosed a $10M stock purchase as Shopify shares plunged. I believe Shopify will scale core services rapidly and shift to an even more merchant-friendly revenue model going forward. With shares dropping as much as they have in 2022, the risk profile is heavily skewed to the upside!

Shopify stock price
Data by YCharts

One of the most unfairly punished stocks in the market right now must be Shopify. The e-Commerce company saw its shares drop from $1,400 at year-end to just $400 on Friday. The reason for the sell-off chiefly relates to Shopify’s slowing top line and gross merchandise value growth now that the pandemic is fading. However, this does not mean that Shopify will stop to grow altogether. Shopify has a lot of potential to grow its merchant base due to the roll-out of new products and a more merchant-friendly revenue structure.
Shopify has made it a point to shift away from purely selling subscription plans and introduced products and services to its platform that create new long term revenue streams for the company, for example from payment processing and from buy now, pay later solutions.

Shopify Product Roll-Outs

Shopify

Shopify
This change in business model means that Shopify’s revenue potential will more and more depend on transaction revenues going forward, which are captured in Shopify’s Merchant Solutions segment… which is where revenues are already growing much more rapidly than the subscription segment. Subscription revenues in Q1’22 totaled $344.8M, showing just 8% year-over-year growth. But revenues in Merchant Solutions, which includes variable transaction fees, grew 3.6 times faster year over year to $858.9M. And this is where things get really interesting: Merchant Solutions were responsible for 71% of revenues in Q1’22 and for a massive 89% of Shopify’s revenue growth.

Shopify Merchant Solutions And Subscription Revenues

Shopify

Shopify
Investors can reasonably expect that the revenue share of Merchant Solutions will continue to increase going forward, and I believe, with subscription revenues growing more slowly, that Merchant Solutions will grow to an 80% revenue share by FY 2023.
The chief reason for this is that Shopify’s most successful merchant products – Shopify Payments and Shopify Capital – are seeing accelerating customer uptake. Shopify Payments is Shopify’s payment processing solution, while Shopify Capital is concerned with giving merchants small business loans to meet their working capital needs. By shifting away from simply selling subscription plans, Shopify has the opportunity to service merchants at every step of the sales process.

Shopify Core Product Growth

Shopify

Shopify
Shopify Payments and Shopify Capital are just two products that are met with soaring demand. Other services that merchants could adopt at scale going forward are Shopify Shipping and Shopify Pay Installments, which help increase store conversions. Additionally, Shopify announced the acquisition of Deliverr in May, a fulfillment technology provider, for $2.1B. The acquisition helps Shopify scale its network while offering merchants (and customers) faster shipping times. Shopify’s growing e-Commerce system and increasing reach is what creates deep value for merchants and shareholders alike.
The shift towards a more merchant-centric business model is resulting in strong revenue growth across cohorts. Newer merchant cohorts are spending significantly more money on the Shopify platform than in the past, a result of Shopify’s growing product density and improving customer monetization.

Shopify Revenue Growth By Cohort

Shopify

Shopify
The e-Commerce company’s founder and Chief Executive Officer, Tobias Lutke, placed an order for the purchase of $10M recently. This stock purchase shows that the company CEO believes in the growth prospects of Shopify longer term, but also that he views the shares of the company to be currently undervalued… which they are!
I am buying more shares of Shopify these days, simply because I believe the market has turned too bearish on the e-Commerce company. Shopify is expected to see revenue growth of 26% this year and 32% next year, meaning shares currently trade at a FY 2023 market-capitalization-to-sales ratio of 6.6 X. Shopify’s commercial growth prospects were much more expensive in the past and given the revenue growth Shopify is looking at in the next two years, I believe the e-Commerce company has become undervalued. Shopify is more expensive than Amazon (AMZN), but Amazon is facing serious revenue challenges right now.

Shopify and Amazon PS ratio
Data by YCharts

Right now, the biggest risk for Shopify is deteriorating market conditions that could add more pressure on the e-Commerce company’s valuation. Shopify’s biggest commercial risk is a continual, post-pandemic slowdown in top line and gross merchandise value growth. What may also weigh on Shopify’s shares is the lack of a clear guidance for FY 2022. Shopify, in its Q1’22 earnings release, only said that it expects revenue growth to be lower in the first half of FY 2022 and highest in Q4’22 due to the absence of e-Commerce boosting pandemic tailwinds, but didn’t provide specifics. With no clear guidance in place, investors may feel uncomfortable buying Shopify.
I am buying the Shopify selloff. The company has a vision for the future and makes targeted investments in core products as well as in its fulfillment center network that will allow merchants to offer customers faster shipping times. I also believe that Shopify’s revenue model is better aligned with the interests of merchants than it was in the past, with Merchant Solutions seeing serious growth momentum. Shares are cheap, and the risk profile remains skewed to the upside!
This article was written by
Disclosure: I/we have a beneficial long position in the shares of SHOP either through stock ownership, options, or other derivatives. 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.

source

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *