Why Shopify Stock Will go 3x From here

This story was written in Q4 2020

So by now you’re awake to the Shopify story. Maybe you gave yourself a pat on the back when you bought at $200 and sold at $220. Or maybe you sold at $300 last September when the stock dipped almost 25% in a matter of weeks because it was ‘overvalued.’ Either way, if you knew what was driving this stock, you would have bought a long time ago and wouldn’t have sold. If you bough a while ago and didn’t sell, congratulations! I’m sure you’ve already told everyone about it.

So do you you feel like you missed it? Stock has gone 3x+ since March and if you had just pulled the trigger when you were ‘watching it,’ you’d have at least doubled your money.

Fear not, my friend. The Shopify story is just getting started. By some (mine) accounts, the stock actually looks pretty cheap right here. Let me explain why

To understand the Shopify story you need to understand a few things.

1. Gross merchandise value.
2. The e-commerce players and how they fit into the market (Amazon, eBay, Shopify, etc.,).
3. Shopify’s business model
4. How a company like this is valued.

So lets jump in.

1. Gross Merchandise Value. Sounds kinda fancy right. This is industry language for ‘literally all the stuff sold on the platform.’ So if Shopify has 10 merchants and they each do $10 of sales, Shopify does $100 of GMV Fair enough? Good. Nothing further. Thx.
2. E-commerce players. For a little background here is a snapshot of what e-commerce looks like as a percent of retail and what companies make up the e-commerce market in 2019, and then again in 2020.

So yes, Amazon owns a huge part of what is actually a fairly small market when you consider it was just 9% of total retail in the United States in 2019.

Then the pandemic hit in early 2020, and this happened:

E-commerce as a percent of retail will probably end up jumping around 4% this year, which makes the e-commerce pie for players like Amazon and Shopify much bigger, and Shopify also made its piece of the bigger pie bigger itself and that is why the stock has been on fire. Its GMV shown in green will basically double from 2019 to 2020 and shopify will now claim around 15% of the overall e-commerce market, which is also growing.

So the point here is really just this: There is a lot of opportunity ahead for e-commerce, and for the companies that are part of the shift of commerce from offline to online — and shopify is moving a lot faster for its size than anyone else.

3. Shopify’s Business Model

Okay, so remember our little primer on GMV? Its important because its how the company makes money. You know how credit card companies charge about 2–3% as a transaction fee? They do that on a GPV — Gross Payment Volume — so it is a similar ‘take rate’ idea.

So Shopify generates revenue in two streams: 1) the $$ amount merchants pay on subscription to have a shopify plan; and 2) The add on services Shopify provides to them, which the company reports as ‘Merchant Solutions’ revenue. Merchant Solutions is made up primarily of Shopify Payments — or the payment processing it offers its merchants, not at all dissimilar to how credit card companies do it.

Additionally, as a merchant you can take advantage of lots of other things Shopify offers to help you grow your business. This could include shipping labels, getting a loan from Shopify capital, and more. Here is a picture of how Shopify made its revenue in 2019:

So let’s talk about a take rate. Which this isn’t really how they run their business but it’s a good way to think about it as an investor. Note: Subscription solutions revenue is nice to have, but merchant solutions is the important one. Why? Because there is more upside. You can only have so many merchants paying you until you have to start monetizing the merchant’s GMV.

In the picture above we see $935.9M revenue for merchant solutions — we already said shopify 2019 GMV was around $50B in the U.S. and they have $61B total.

So divide $935.9M by $61B and you get about 1.53% for a take rate for 2019. Here is a chart of the Company’s GMV and take rate over time, and consequentially to the right its revenue growth. Note forward estimates are per consensus estimates at the time of writing.

For a company at this scale to be growing GMV and Revenue at these rates is pretty crazy. Big things aren’t supposed to move fast.

4. How a Company like this is typically valued in the public market.

So we know the Shopify story is awesome. They’re growing, ecommerce is booming and Tobi Lutke went form being a computer nerd no ones ever heard of to one of the most influential (and rich) tech entrepreneurs seemingly overnight.

But the stock is so overvalued, you say. All of that future growth is already priced in, you say.

To which I eloquently ask; Is it tho?

If Shopify grows GMV by only 10% next year, then back to a more normal rate in 2022, 2023, and 2024, you can pretty easily arrive at around $300B for GMV and around $4.5B in revenue in 2024 at the current take rate (which would be worst case scenario for Shopify on the take rate). For context, Amazon’s take rate is around 30%ish, Etsy is around 15%ish, and eBay is 10–11% (ish).

So lets look at what Shopify’s revenue would be with the current GMV growth and constant take rate (this is obviously quick and dirty)

So looking at 2024 revenue; lets change the take rate a little bit and see how drastically that effects revenue:

Basically, Shopify could have the lowest take rate of any e-commerce marketplace by a pretty wide margin at 8%, and still be generating $25B in revenue in 2024. Currently the stock trades at around 38x forward twelve month sales, because it is pricing in a lot of this growth, but not all of it.

Let’s just say that by 2024 Shopify’s growth slows somewhat and so its multiple comes down from 38x forward twelve months sales allllllll the way down to 12x trailing 12 month sales. If we are at ~$23B in sales in 2024, 12 times that represents a market value for Shopify of $276B — or about 84% upside (note: this would be a drastic increase in take rate in a very short period of time and isnt very realistic, but I wasn’t about to model out to 2030).

Please, this is not a price target. It is simply an exercise to demonstrate the power of the take rate for shopify. Expanding the take rate more more than 4 times over 4 more years involves significant execution risk — not to mention the company would need to continue to grow GMV by taking market share from players like Amazon. So all in all — Shopify should work toward expanding its take rate. If it does, and I think it will, then this looks like a pretty good entry point, even if it is up 4,000+% since IPO. I have a full model explaining this if anyone is interested.

Shopify vs the world ~ place your bets