The epidemic e-commerce dividend peaked, Q4 loss of $371 million, Shopify's strong growth will end?

Financial Associated Press | New Consumption Daily (reporter Gao Mengyang intern Dong Jingyi) news, as a strong competitor of Amazon, Shopify has been widely optimistic about investors after its listing. During the epidemic period, due to the contraction of offline business, online e-commerce has achieved new growth. From the beginning of 2020 to the end of 2021, Shopify's market value has soared by 240%.

On February 16, Shopify released its fourth quarter 2021 financial report showing that its total revenue for the record period reached $1.38 billion, exceeding market expectations of $1.34 billion, an increase of 41% year-on-year, mainly due to strong growth in subscription solutions and merchant solutions revenue. However, net profit turned into a loss of $371 million year-on-year, compared to a net profit of $124 million in the same period last year.

Specifically, subscription solution revenue was $351 million, up 26% year-over-year, primarily due to more merchants joining the platform. Merchant Solutions revenue increased 47% year-over-year to $1,028.8 million, driven by GMV growth, which surpassed $1 billion for the first time.

However, Shopify, which has gained rapid development due to the epidemic, will also find it difficult to continue to eat dividends when the global epidemic slows down. Shopify CFO Amy Shapero said at the earnings conference: "We believe that by the first half of 2021, the e-commerce acceleration that spreads into the first half of 2021 in the form of lockdowns and government stimulus will disappear in 2022. ”

The day after the earnings report, Shopify's stock price fell. For an asset-light company like Shopify whose high valuation is mainly derived from its future prospects, a slight change in business model will have a huge impact on its valuation.

Amazon's Challenger?

Shopify founder Tobias Lutke once said that Amazon wants to build an empire, and Shopify is giving the rebels weapons.

Amazon is undoubtedly the leader in retail e-commerce, but Shopify is becoming a strong competitor for Amazon with its significant growth rate. Since 2006, Shopify has built a customer base of more than a million merchants worldwide, ranging from small startups to major food and clothing brands.

Shopify takes a completely different path from Amazon, Amazon provides a unified sales platform for sellers, and Shopify serves as a tool to help sellers operate their own independent websites, including providing website building services, building brands, managing brands and a series of supporting services, and its decentralized nature is more conducive to brands to show their own characteristics and establish their own customer groups. Especially for Chinese sellers who have experienced Amazon's "banning tide" and are more focused on developing their own brands, building a website has become a new choice.

The earnings report shows that Shopify's GMV for the full year of 2021 is 45% of Amazon's market, reaching an all-time high of 48% in the fourth quarter, in other words, Amazon is only twice the size of Shopify, and in 2018, Amazon is four times that of Shopify.

Today, Shopify is setting its sights on the Chinese market to further expand its business. In January this year, Shopify launched the JD Mall sales channel, opening up to merchants to the world's largest e-commerce market. Aaron Brown, vice president of Shopify, said in the company's announcement: "Combining two world-class commerce platforms, Shopify and JD.com, is an important step in solving the cross-border business problems of merchants. ”

Shopify expects China's e-commerce market to be worth $3.3 trillion by 2025, more than five times the value of the U.S. e-commerce industry. In 2021, more than half (52%) of China's retail sales will come from e-commerce channels.

The cooperation will help international brands on Shopify to establish their own stores in JD.com, and at the same time, JD.com will also help Chinese brands establish their own DTC channels through Shopify, so that more domestic brands can go abroad.

In addition, Shopify has also launched a number of features to increase its appeal to businesses, such as the money management product Shopify Balance, the small business loan business Shopify Capital, and shopify Plus, a hosting platform dedicated to large enterprises. At the same time, Shopify also expects to sell NFTs on its platform.

The rapid development brought about by the epidemic is coming to an end

Although Shopify has gained huge benefits from the epidemic, due to the liberalization of epidemic control, the recovery of the offline retail industry has actually impacted Shopify's performance.

Affected by the epidemic, global offline retail has been severely hit, disguised to stimulate the development of e-commerce, many small and medium-sized enterprises began to shift their business to online, taking Ireland as an example, in 2020, Ireland's online retail sales increased by 159%, much higher than the average annual growth rate of 32% from 2017 to 2019.

As a one-stop SaaS model of e-commerce service platform, Shopify has developed rapidly in the early stages of the epidemic, with revenue exceeding $2.9 billion in 2020, an increase of 86% compared to 2019. The data shows that from March 2020 to January 2022, Shopify added 2.5947 million online stores. In less than two years, the number of stores increased by as much as 201.53%.

But with the easing of the epidemic, the company's business began to decline since last year, and the online shopping that has reached its peak began to make way for more offline retail and physical store experiences, and its third-quarter performance fell short of market expectations for the first time, and the fourth quarter, although the performance was better, was mainly driven by the "Black Friday" and "Cyber Monday" holiday sales seasons.

While its annual revenue in 2021 is almost three times that of 2019, a slowdown in growth is already evident, with revenue growth of 57% in 2021, down from 86% in 2020.

As growth slows, capital spending will also grow. At the earnings session, Shopify also outlined plans to increase its investment in the Fulfillment Network, which expects capital expenditures related to fulfillment networks to increase in 2022 and reach about $1 billion by 2023 and 2024.

Investing more in consolidating networks is a way to reduce costs, improve efficiency and strengthen control, and Shopify expects to exchange huge upfront investments for subsequent profits, but it also poses risks if merchants don't actually use warehouses. In January, Shopify terminated its contracts with several warehouses and fulfillment partners due to slowing demand.

At the same time, Shopify said that the accelerated growth of e-commerce triggered by the new crown epidemic will continue into the first half of 2021 and will disappear from 2022, with inflation and consumer spending being cautious throughout the year in the short term.

According to Bloomberg, more than 20 analysts lowered their price targets after the company revealed that full-year revenue growth would be lower than in 2021. As a result, Shopify's stock price plummeted, losing billions of dollars in market capitalization.

The stock fell 11.63 percent the next day in New York after falling 17 percent after the earnings report. Since peaking in late November, prices have fallen by more than 50%.

While Shopify has competitors such as BigCommerce, WooCommerce, and Square, which also provide one-stop shops for businesses, Shopify's impressive performance also indicates its leading position in this segment. In 2021, Shopify's market share in the United States has reached 10.3%, ranking second, compared to the 41% of Amazon, which ranks first, Shopify still has room for growth in the future.

During the epidemic, the market's optimism about the end of this growth stock makes its valuation too high, and the emergence of the phenomenon of killing valuations at this time is also a signal that the market is gradually calming down, and Shopify will gradually return to the normal growth path in the future.