A 'slept on' Business Model: Shopify

Shopify (NASDAQ: SHOP) is a leading player in the digital infrastructure and e-commerce space, offering an all-in-one platform for merchants to create online stores, manage sales, and scale their businesses.

Here’s our September report on Shopify but read on for our latest analysis.

Let’s look at Shopify’s Business Model

Unlike traditional software companies, Shopify's revenue model directly benefits from the success of its users.

Shopify charges a subscription fee for its services and takes this modest base fee from each of its 2.1 million merchants, but it makes most of its money on the success of those merchants via transaction fees and added services. In short, Shopify profits every time a merchant does well, making its revenue exponentially scalable.

Shopify's growth potential could be higher than current expectations, as it benefits not only from a surge in digital entrepreneurship but also from the financial success of its existing merchants.

In yesterday’s Q3 earnings report, they highlighted same-store sales growth of existing merchants as a leading factor in revenue growth.

Riding the Wave of “Hustle Culture” and Financial Freedom

In today’s “hustle culture,” Shopify has become the go-to platform for people seeking financial independence through online businesses. Whether it's Gen Z, seasoned entrepreneurs, or side hustlers, Shopify has won over aspiring business owners in search of flexibility. In the current market, Shopify’s name is nearly synonymous with e-commerce: anyone looking to start a business online will likely consider Shopify. The rise of independent entrepreneurship is a trend that shows no signs of slowing, fueling Shopify’s steady march forward.

The Multi-Dimensional Growth Play and larger clientele

While Shopify initially catered to small and medium-sized businesses (SMBs), it’s now moving upmarket with an aggressive focus on larger, established businesses. This is a significant shift, opening doors to high-value partnerships with traditional brick-and-mortar retailers and B2B merchants who are moving online. Larger clients bring higher revenue per user, potentially offsetting the seasonal fluctuations typical with smaller merchants. In Q3 they were able to start serving brands like Reebok, Off-White, Victoria’s Secret, etc.

The adoption of direct-to-consumer (D2C) sales by big brands also aligns perfectly with Shopify’s model. These large, direct-sales setups don’t just bring in higher revenue—they amplify Shopify's brand appeal across markets, broadening its base beyond the entrepreneur segment.

2024: Macroeconomic Trends and Shopify’s Strong Tailwinds

The e-commerce industry as a whole is in good shape, expected to reach a colossal $5.5 trillion by 2027. Shopify is sitting at the intersection of several key industry trends, including:

Mobile Commerce and Social Shopping:

More people than ever are shopping through their phones and on social platforms. Shopify’s seamless integrations with mobile and social media cater directly to this behavior.

Global Reach with Cross-Border Commerce:

Shopify’s “Markets” feature makes it easier for merchants to sell internationally, an increasingly lucrative segment. Merchants selling in different locations experienced the highest growth in sales. Their international growth continues to outpace North America at 36% growth in the number of merchants.

Personalization & Omni-Channel:

Shopify empowers merchants to create personalized experiences and synchronize online and offline sales, meeting consumer expectations for a smooth, multi-channel shopping experience.

These aren’t just passing trends; they are fundamental shifts in how people shop, giving Shopify long-term growth levers.

Risks to the business

There are a few risks worth considering:

Intensifying Competition:

Shopify faces rivals like WooCommerce, Wix, and BigCommerce, as well as giants like Amazon. While Shopify’s intuitive, all-in-one approach is a strong differentiator, the entry of more accessible options could still put pressure on customer acquisition.

Dependence on SMB Success:

Shopify’s revenue is tied closely to its merchants’ performance. Any economic downturn could lead to a wave of small businesses shuttering, which would impact Shopify’s revenue from subscriptions and transaction fees.

Logistics Outsourcing Challenges:

Shopify recently sold its logistics division to Flexport. While this frees up resources for other priorities, any hiccups in Flexport’s operations (delays, inefficiencies, etc.) could hurt Shopify’s brand reputation, especially with merchants who rely on seamless logistics.

Despite these challenges, Shopify’s growth story remains compelling. In fact, its strategic decisions—such as focusing on larger clients and expanding internationally—seem crafted to mitigate many of these risks over the long term.

SUMMARY: Why Shopify’s Underappreciated Upside is Too Big to Ignore

Shopify’s stock has often been described as “expensive,” but valuation alone doesn’t tell the whole story. Unlike other companies, Shopify doesn’t just sell software; it builds and nurtures an entire commerce ecosystem. As Shopify scales with the global economy and its merchants, it holds unique upside potential tied directly to the financial success of those who use its platform.

Shopify’s value lies not only in what it’s achieved but in the space it’s carving out in the future of commerce. With growing market presence, expansion into larger accounts, and tailwinds from consumer trends, Shopify stands ready to reward patient investors who see beyond its current valuation.

Disclaimer

This analysis is for informational purposes only and does not constitute financial advice. It is not a recommendation to buy, hold, or sell any securities. Investors should conduct their research, seek professional advice, and consider their financial goals and risk tolerance before making investment decisions. The author and associated parties rely on publicly available information and assume no responsibility for the accuracy or completeness of the information provided and any losses that may occur from using this information. Past performance is not indicative of future results, and investment risks apply. The author may hold positions in discussed securities, which may change without notice.