Sept 21 2021 - Competitors Can't Match Shopify's Flywheel

Summary

• Shopify has over 1.7 million merchants bringing in a cumulative 12-month GMV of over 0 billion by accessing 7,000 apps.
• Shopify is dramatically outpacing competitors like BigCommerce with revenue growth.
• Given all the merchants in the Shopify ecosystem, Roku had no choice but to announce that they’re introducing an ad app to the Shopify App Store.

JHVEPhoto/iStock Editorial via Getty Images

Introduction

My thesis is that Shopify (SHOP) will continue outperforming competitors as there is no one out there with similar flywheel numbers. Shopify’s combination of 1,749,000 merchants, 7,000 apps/tools and trailing-twelve-month [TTM] GMV of 1.6 billion is mindboggling:

Image Source: 2Q21 presentation

BigCommerce (BIGC) CEO Brent Bellm spoke at the March 2021 Canaccord Genuity Forum saying there are only 4 serious platforms in the e-commerce space:

So at the leading edge of e-commerce, I think there are really only 4 platforms. There's us. There's Shopify. There is, yes, Salesforce. There's Magento, which is the on-premise one of the group. And there's fewer microservices platforms. There's commerce tools out of Germany. I think those are the 5 really good platforms. And anybody who's been following this industry for the last half dozen years knows that for the most part, nothing else has been funded, right? You've seen lots of platforms close or sell or languish, but you've not seen anything new get funded.

We’ll begin by showing how Shopify is advantaged with respect to Adobe’s (ADBE) Magento, Salesforce’s (CRM) Demandware, and BigCommerce.

Flywheel: More Merchants

The Management’s Discussion and Analysis section in Exhibit 1.3 of the 2020 40-F shows that the number of Shopify merchants grew 64% from 1,069,000 in 2019 to 1,749,000 in 2020. By contrast, a March Digiday writeup says Magento has over 250,000 merchants and BigCommerce only has 60,000. Stats from BuiltWith imply that Demandware from Salesforce has even fewer merchants than BigCommerce.

Flywheel: More Channels, Partners & Capabilities

The Management’s Discussion and Analysis section in EX-99.2 of the July 28th 6-K filing reveals that there are 7,000 apps in the Shopify App Store which is over 50% higher than the 4,600 figure from the year prior. By contrast, the March Digiday writeup mentioned earlier says Magento has 3,819 apps known as extensions and BigCommerce has about 900 apps. Being part of the Salesforce AppExchange, Demandware merchants have access to 3,000 apps and components but many of these are outside of e-commerce.

This part of Shopify’s flywheel is more than just the 7,000 apps. Having a merchant-first focus, Shopify did many things from 2004 to 2017 in order to catalyze merchant sales per the 2Q21 earnings presentation:

Image Source: 2Q21 earnings presentation

The developments continued from 2018 to 2021:

Image Source: 2Q21 earnings presentation

After the above 2Q21 presentation was released, Roku (ROKU) announced that they are building an app that will soon be available in the Shopify App Store:

Image Source: Roku September 2021 announcement

I have not yet seen Roku make a similar announcement for Magento, Demandware or BigCommerce at the time of this writing.

The contribution from partners was acknowledged in the 4Q20 earnings call. Partners made Shopify the e-commerce platform of choice when merchants moved online during the Covid pandemic:

Our summary of 2020 would be incomplete without acknowledging the enormous contribution of our partners to our merchants' success. Over the course of the year, more than 42,000 partners referred a merchant to Shopify, up 72% compared to the 12 months ending December 2019. Underscoring the strong demand for our partner skill sets in the shifting commerce landscape. Our partners played an incredibly important role in helping our merchants to adapt to the rush to online shopping, getting stores up and running fast and preparing our merchants to maximize new opportunities. To shape their stores with the features that are important to them, merchants made heavy use of our incredibly rich portfolio of more than 6,000 apps, with our app partners alone earning more than 0 million from Shopify in 2020.

Given all the resources in the Shopify ecosystem, institutional investors like Kevin O’Leary give Shopify free advertising by encouraging their merchants and other merchants to use Shopify for e-commerce. Kevin O’Leary discussed the way things changed during the Covid pandemic, saying that small businesses typically had about 50% of their sales in retail, 40% on Amazon (AMZN) and 10% direct to the customer through their website. When the pandemic shut down the 50% retail, small businesses stepped up on Shopify and came to find that they could have the same net cash flows with just half of the old sales. Merchants realized that for every incremental dollar they could do on Shopify, they would get an extremely high gross margin.

Flywheel: More GMV

The TTM GMV for Shopify through June 2021 is 1.6 billion.

Slide 14 of a November 2018 Magento Presentation shows GMV of 5 billion plus but Shopify and other SaaS solutions should continue to take GMV from on-premise solutions like Magento:

Image Source: November 2018 Magento Presentation

Salesforce can be taciturn with respect to Demandware’s GMV level and I haven’t seen it listed recently but it has to be significantly lower than Shopify’s seeing as Shopify has much higher revenue along with a lower take rate. Quarterly revenue for BigCommerce is nearly 23 times smaller than Shopify’s quarterly revenue such that GMV for BigCommerce has to be a small fraction of what we see with Shopify.

Summary Of Leading Edge Competitors

Magento doesn’t look bad from the raw numbers above but there are qualitative factors. SaaS companies like Shopify and BigCommerce are always taking merchants from on-premise companies like Magento. BigCommerce CEO Bellm talked about this in the 2Q21 call:

And although I can say the platform that has the most contributing migrations is Magento, even ahead of Magento are custom builds and custom platforms at the enterprise level. And then there's everybody else is kind of trailing Magento but they're all got up to a far bigger number than Magento itself. So it's a very diverse mix. There are more than 500 platforms around the world, B2C and B2B. Most of them are old, declining, underfunded and will -- and just keep contributing opportunities to us in the years ahead. And that's in addition, of course, to all the new businesses, new brands, new sites, new geographies that customers will spin up sites for.

BigCommerce CEO Bellm spoke about Magento declining at the March 2021 Canaccord Genuity Forum mentioned earlier:

I'm not even going to include Magento in that because Magento is declining. Lots of companies are leaving Magento, which is, again, on-premise open source and going to SaaS.

I like what the January 2020 Heller House letter says about Shopify eating Demandware’s lunch with respect to revenue growth:

Image Source: January 2020 Heller House letter

I haven’t seen recent revenue numbers for Magento but Shopify heavily outperforms BigCommerce. Shopify has been growing revenue much faster than BigCommerce over the last few years and Shopify started with a much larger base:

Image Source: Author’s spreadsheet based on company filings

Said another way, Shopify has gone from having nearly 12 times as much revenue as BigCommerce in 3Q18 when they were at 0 million and million, respectively, to having nearly 23 times as much in 2Q22 when they reached ,119 million and million, respectively.

Other Competitors

Ostensibly Shopify faces many other competitors from the BuiltWith list below:

Image Source: BuiltWith

The reality is that none of the above competitors threaten Shopify at this time. WooCommerce is free so they have a large number of raw merchants experimenting with it but their low GMV shows that the number of serious merchants is limited. A WooSesh post says WooCommerce had GMV of around billion in 2019 while Shopify’s GMV was about 5 times that amount in that year, coming in at over billion. And Shopify’s GMV has exploded since that time, coming in at 1.6 billion for the TTM through June 2021.

Open-source options like WooCommerce, PrestaShop and OpenCart have security vulnerabilities. Wix (WIX) CEO Avishai Abrahami explains the things SaaS companies like Shopify, Wix and Squarespace (SQSP) are doing to differentiate themselves from open-source options at the May 2021 JPMorgan Global Technology, Media and Communications Conference:

But I think all 3 companies are trying to transform this market from legacy hosting with the part of open-source from them into modern SaaS environment in which you can immediately provision, you don't have to worry about security, you don't have to worry about uptime and performance, everything is handed for you. So this is where we share a vision.

At the same JPMorgan (NYSE:JPM) conference, Wix CEO Abrahami notes that they and Squarespace compete with legacy companies but the competition with Shopify is limited:

I think today, we have well, we completely Shopify somewhat, right, not really, right? So I always say that there's about 7% where we compete and 93% where we don't. But when it comes to Squarespace, we both compete with this huge legacy out there, right? So -- and together, we are probably about 15% of the market.

BuiltWith’s list of the number of websites in the top 10k gives us a better sense of serious merchants than their top 1 million list shown earlier:

Shopify: 424

WooCommerce: 182

Magento: 180

Squarespace Add to Cart: 77

Magento Enterprise: 61

SAP (SAP) Commerce Cloud: 61

Salesforce Commerce Cloud/Demandware: 59

Shopify’s revenue went up 47% from 2018 to 2019 and then 86% from 2019 to 2020. Wix and Squarespace are not in this same ballpark:

Shopify revenue from 40-F filings:

2018: ,073 million

2019: ,578 million, 47% annual growth

2020: ,929 million, 86% annual growth

Squarespace revenue from the April 2021 S-1 filing:

2018: 0 million

2019: 5 million, 24% annual growth

2020: 1 million, 28% annual growth

Wix revenue from 20-F filings:

2018: 4 million

2019: 1 million, 26% annual growth

2020: 9 million, 30% annual growth

Closing Thoughts

None of the existing competitors are close to Shopify and new entrants will have a hard time catching up. BigCommerce CEO Bellm spoke at the March 2021 Canaccord Genuity Forum mentioned earlier, acknowledging the importance of Shopify’s head start:

I don't know how to go in and make up for Shopify's 5-year head start with SMBs, but I do know how to do disruptive innovation.

My valuation thoughts haven’t changed much since my August article. Quotidian thinking might mean Shopify should have a price to sales ratio similar to their peers but their growth rate should continue to be higher than peers. The stock looks expensive based on today’s metrics but competition is not a threat at this time and Shopify still has massive growth ahead.