The performance of the domestic stock market in recent days must be obvious to everyone. Although Dolphin Investment Research believes that many high-quality assets in China have really entered the undervalued range, the temporary performance of the stock market may not necessarily reasonably reflect the performance and value of enterprises, and the road to accompany the return of value is not tolerable for all investors.
At the same time, we purely start from the needs of investors themselves, and if there are opportunities for global allocation, it may not be a wise choice to choose to hang on a single tree. Therefore, we will gradually increase our coverage of global high-quality assets in the future, and today we have chosen Shopify, the second largest in the United States by GMV and the 19th largest in the U.S. stock service industry by market capitalization.
Since most investors (including us) may not be familiar with this small giant company, this research will focus on sorting out Shopify's specific business model, revenue sources, core business, and competitiveness, and then understand what kind of company Shopify is, so that we can carry out more in-depth analysis in the future.
Here's a closer look:
1. What kind of company is Shopfiy?
1. Shopify's size and status
As the first research on Shopify, the first question that needs to be answered is naturally what kind of company is Shopify for, as most investors in China (including us) are not very familiar with it.
According to 3Q23 data, the annual run-rate GMV is about $225 billion, second only to Amazon, and the GPV (payment amount) is $131.2 billion;
The full-year run-rate revenue was about $6.86 billion (corresponding to a P/S valuation of about 15x), but the operating profit in a single quarter in 3Q23 was only $120 million, which has not yet been stable and continuous profit.
Based on the above figures alone, it can be roughly seen that Shopify is a company with a leading market share & position in the e-commerce and payment fields in Europe and the United States, as well as SaaS companies with a typical large volume but thin profits, and high market capitalization and valuation (in an absolute sense).
Features of the company.
2. What is Shopify's business model (business)?
Also one of the characteristics of SaaS companies, Shopify has a large and diverse number of products & services, including various online store construction and operation SaaS tools, e-commerce fulfillment related services such as payment & logistics, financial services such as merchant and consumer lending, as well as recently launched advertising tools and other functions. The company's business is relatively complex, so the following is combined with the company's development timeline to summarize the categories of the company's business.
(1) SaaS tool stage for online store building: Since its establishment in 2006, Shopify's main business & service has been to provide low-cost &low-threshold tools for building online stores (websites) to small and medium-sized merchants who lack professional ability or capital;
Subsequently, based on the various tools required in merchant operations, it opened up to allow third-party developers to provide various plug-in functions to merchants based on the Shopify apps platform, further enriching the ecosystem of SaaS tools for opening stores. At this point, Shopify is positioned as a pure SaaS tool provider.
(2) Introduction of payment & logistics, e-commerce platform stage: Along with merchants, Shopfiy indirectly launched payment (Shopify payments) and fulfillment logistics (Shopify shipping) services from 2013 to 2015. It marks that Shopify has basically provided all the core functions required for e-commerce operations in addition to the customer acquisition function in the entire set of online transaction process of "store building, customer acquisition, transaction/payment, fulfillment, and after-sales". In other words, Shopify is positioned like an e-commerce platform at this stage.
(3) Service enrichment and diversification stage: From 2015 to 2017 (only a rough time division), Shopify continued to strengthen the three core functions of the e-commerce platform of "opening a store, acquiring customers, closing/paying, and fulfilling". This includes, but is not limited to, cooperating with Pinterest and Facebook to enable Shopify merchants to directly attract transactions on social platforms to enhance customer acquisition functions, introducing third-party payment channels such as Apple Pay and launching self-built Shopify pay to enhance the applicability and convenience of payment, and cooperating with Amazon to allow Shopify merchants to directly import their stores to Amazon. After this stage of reinforcement, Shopify has become almost a mature e-commerce platform. Compared with Amazon, the only qualitative difference is that Shopify still does not have a centralized platform for attracting and distributing traffic, but allows merchants to go to other traffic platforms on their own.
(4) Diversified omni-channel stage: From 2018 to now, after improving its functions and establishing its position as the second e-commerce platform in the United States, Shopify has entered the stage of business diversification and breakthrough.
First of all, in terms of services, along with the functions that were mainly adapted to online merchants, such as "store construction, online payment, and logistics fulfillment", Shopify has extended from store construction to general SaaS tools such as tax payment, payroll, and employee management, and from online payment to Shopify POS offline payment, acquiring business, and providing financial services such as loans and capital turnover to merchants.
Due to the transformation of the above services from e-commerce to universal, the customer base on Shopify is no longer limited to online, but extends to offline merchants and B2B enterprises such as wholesale. Generally speaking, Shopify has begun to break away from the shackles of "quasi-e-commerce platform" positioning, and expand to online, offline, B2B and other omni-channel users by virtue of the universality of store management tools and financial payment tools.
It's also worth noting that Shopify acquired logistics service provider Deliverr in July 2022 to strengthen fulfillment capabilities, one of the barriers to e-commerce business, but then spun off its entire logistics business, Shopify Shipping, to Flexport just a year later. Dolphin Investment Research believes that the logic behind Shopify's huge reversal of its attitude towards the fulfillment business in a short period of time may not only be forced by the external pressure of the stock price crash and macro headwinds at that time, but also reflect the company's return from the positioning of "quasi-e-commerce platform" to the positioning of SaaS companies to a certain extent.
3. What does Shopify make money on?
In the above, we have summarized the development and evolution of Shopify's business since its inception, as well as the current strategic direction. So when it comes to the company's revenue and profits, what is Shopify's own profit model?
According to the company's financial report disclosure, the company's revenue sources are divided into two categories - subscription service revenue and merchant service revenue. It can be seen that with the company's total revenue increasing nearly 10 times from 2017 to 2022, the proportion of merchant services and subscription services in revenue has gradually changed from almost flat (54% : 46%) to merchant service revenue accounting for the majority (73% : 27%). It can be seen that at present, merchant services are the main source of the company's revenue.
However, in terms of gross profit (the company does not disclose the composition of operating profit), the gross profit margin of subscription services is nearly twice that of merchant services (about ~80% and ~40%, respectively), so the proportion of gross profit contribution of merchant services and subscriptions is similar (about 58% to 42% in 2022). In other words, the two main categories of revenue sources of a company are essentially equal in importance.
So specifically, what are the detailed components and driving factors of the above two types of income?
In the table below, we've counted Shopify's fees for merchants of different sizes under three categories: online, offline, and omnichannel.
Notable points include: in addition to the fixed subscription fee that matches the size of the merchant, the company's main monetization channel is the payment fee (2.4%~2.9%) based on the proportion of transaction amount when the merchant completes the payment through Shopify payment.
If the merchant chooses to use other third-party payment channels (such as Block, PayPal), in addition to the payment fee to other payment channels, Shopify will charge the merchant a transaction fee of 0.5%~2% (with a punitive nature).
(1) Subscription service revenue: As the name suggests, this part of the revenue only includes the subscription fees paid on a regular basis (monthly or annual) by the merchant subscribing to the various service toolkits launched by Shopify. On the one hand, the growth elasticity of this type of income is not high (so the proportion of revenue is gradually decreasing), but it also has the characteristics of stability and recurrence, which is a ballast income. At the same time, because the marginal cost per new user of subscription SaaS services is basically non-existent, the profit margin of this part of the revenue is higher.
Similarly, the driver of this part of the revenue is relatively simple and pure, i.e., the number of merchants in Shopify at different sizes * the corresponding monthly/annual subscription fee, which is simplified to the subscription service revenue = total number of merchants * average subscription fee per merchant.
(2) Merchant service revenue: The composition of this part of the revenue source is relatively complex. In addition to fixed subscription revenue, other types of income, including typical payment fees, (punitive) transaction fees, logistics service fees, interest income from merchant loans or buyers' consumer loans under financial services, and various general management SaaS tools (such as CRM, ERP, etc.) are all classified in this category.
Although the composition is complex, the company does not specifically disclose the revenue contribution of each segment of the business under this category. However, according to an earlier (2017) study, the number one source of merchant service revenue (75% at the time) was the payment fees charged by merchants using Shopify payment, and the second largest source (10% at the time) was transaction fees. In other words, the vast majority of Shopify's merchant service revenue comes from the payment business (transaction fees are essentially a substitute for payment fees).
Revenue contributions from emerging diversified businesses, such as advertising services (recently launched), logistics business (sold), financial lending, and offline POS hardware sales revenue, are relatively secondary.
The drivers of merchant service revenue can be simplified and split into: in the overall transaction value (GMV) realized by Shopify merchants, the male part using Shopify payment, payment fee income = total payment amount (GPV) * average fee rate (2.4%~2.9%), and the part that does not go through Shopify payment, transaction fee revenue = (total transaction amount – payment amount) * transaction fee rate (0.5%~2%).
4. Summary: After the above brief combing of Shopify's business development, as well as revenue and profit sources, the current perception of Dolphin Investment Research is: "on the face" Shopify is a class e-commerce platform that provides the functions required for the online operation of independent stations, and its main competitor is Amazon; A company whose tool is a customer acquisition channel and takes payment as the real core monetization channel is more of a financial payment company at its core.
According to the company's presentation at the company's 2023 investor conference, 25% of the company's total revenue currently comes from subscription revenue from retail SaaS tools, 60% from payment-related, and the remaining 15% from financial lending and other general-purpose SaaS tools. The above judgment can also be glimpsed from the level of income proportion.
2. What are Shopify's strengths, barriers, and story?
1. Where are the Shopify barriers in e-commerce and payment?
Since the core of Shopify is a payment company, according to Dolphin Investment Research's current understanding of the payment industry, there are two intuitive ways for payment companies to form competitive barriers: (1) similar to Alibaba, relying on its own head transaction channels (platforms) to achieve a stable and exclusive payment scale, and using this as the basic disk to expand to external channels; (2) It is similar to WeChat Pay, relying on a huge user base and coverage of a huge number of offline merchant payment scenarios, relying on the bilateral effect of the network and the scale effect to win.
Corresponding to these two ways, it can be seen that the barrier of Shopify is the independent station e-commerce system it has built, which provides an independent, controllable and exclusive payment scenario. Based on this, we will expand to omni-channel payment scenarios including offline stores. Block, another payment company covered by Dolphin Investment Research, first covered the payment scenarios of small and medium-sized stores scattered offline to form certain barriers, and then launched an online digital wallet Cash App to broaden the use scenarios.
Following the above logic, Dolphin Investment Research believes that the competitive advantage or barriers of Shopify depend on the following two questions: (1) Shopify's characteristics are also basic -- in terms of e-commerce business, what are the advantages and disadvantages of independent stations compared with traditional centralized e-commerce platforms? Can the independent station format continue to exist, and how will its share in the entire e-commerce market change?
(2) From the perspective of a general-purpose payment & SaaS company, there are quite a lot of overlaps and similarities between the products of other payment service providers such as Shopify and Block (POS payment hardware, online and offline payment channels, store management tools, C-end payment wallets and other services are basically available to all payment companies).
So in addition to Shopify's focus on online merchants and Block's focus on offline stores, do Shopify's products and services have unique advantages?
Both of these questions deserve in-depth analysis, but due to time constraints, this article will only lead to the questions, and will be discussed in more detail in the subsequent research on Shopify.
2. The company's future growth point
However, the payments industry is a near-borderless (no business format can do without payments), and seller-side TAM estimates are often close to $10 trillion, and even leading companies like Shopify have a market share of more than single digits. In other words, the payment industry is an industry with a large number of individuals, low penetration rate of fintech payment channels, and a fairly fragmented market share. Therefore, before the penetration rate tends to be saturated and competition among peers is inevitable, it is also worth paying attention to how the company "stakes its ground" and tells its own growth story.
Based on the previous simple breakdown of the company's revenue drivers: subscription revenue = number of merchants * subscription fee per merchant, while payment fee (transaction fee) revenue = number of merchants * amount paid (sales) per merchant * corresponding fee rate. As you can see, the most critical drivers of Shopify's revenue for the two categories are the number of merchants it reaches, and the amount of payments/transactions generated by a single merchant. In order to promote the growth of these two indicators (and thus promote the company's revenue growth), the company's current development direction is summarized in three points, namely, merchant enterprise (developing a large number of enterprise users), globalization (developing overseas markets), and omni-channel (developing offline stores). (In fact, these three development directions are quite similar to the choices of its peers, Block). So how does Shopify actually perform in these three directions?
(1) Merchant corporatization, in other words, from the original small and medium-sized businesses with limited service funds and strength, to medium and large-scale, and even enterprise-level merchants. According to the above statistics, Shopify's monthly fee for regular merchants is divided into three tiers of $39~$399, in addition, Shopify actually has another tier of "Shopify Plus" service for enterprise-level merchants, with a minimum monthly fee of not less than $2000.
So, while Shopify had more than 2.2 million regular merchants at the end of '22, it had less than 18,000 Plus merchants (i.e., less than 1%). However, due to the fact that the average monthly subscription fee of non-Plus merchants is less than $40, Plus users actually contribute about 33% of the company's monthly subscription revenue with less than 1% of the price difference of about 50 times.
According to Credit Suisse's calculations (the company did not officially disclose the split), in 2022, the GMV and GPV generated by Plus merchants accounted for 47% and 46%, respectively. Since the bulk of merchant services revenue corresponds to GMV and GPV, it can be assumed that Plus merchants also contribute at least 40% of merchant services revenue (according to Credit Suisse's estimate of more than 50%). In other words, Plus users already account for roughly half of Shopify's revenue.
At the same time, in terms of merchant growth and subscription fee growth, it can be seen that the subscription revenue contributed by Plus merchants has increased by more than 20% in 22 years, while the growth rate contributed by regular merchants has been close to zero. From this point of view, Shopify's progress in high-end users and enterprise is relatively successful, and Plus merchants have played an important role in both contributing revenue and driving growth.
(2) In the global market, Shopify's progress in globalization is slightly lower than that of enterprise users. According to the company's disclosure, by 2023, non-North American regions will contribute 36% of the GMV, which is remarkable, but it is still slightly inferior to the nearly 50% contribution of Plus users. In addition, the increase in the proportion of overseas GMV is about 5%~6% every 4 years. In other words, if this pace is maintained in the future, it will take 9~11 years for overseas GMV to reach 50%, which is obviously not fast.
(3) The progress of omnichannel (offline) (as of the recent past) is even less satisfactory. Again, the company doesn't disclose, but Credit Suisse estimates that by 2022, offline support scenarios (i.e., payments via POS) will account for only about 10% of the company's overall GMV of about $197 billion, which is a slow pace.
On the one hand, it is understandable that Shopify's advantages are not offline, but in other words, in the case that Shopify's payment fee rate is not available, and it is difficult to form a clear competitive advantage, what can the company rely on to attract many offline stores and seize the most frequent and large-scale barrier advantage of offline payment, which is a question worthy of in-depth consideration by the management and us.
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