Does Shopify Have Pricing Power?
With news out today that Shopify is expanding vertically into e-commerce fulfillment, I thought it would be timely to write about their pricing power. If you don’t know already, Shopify is a subscription service that provides solutions for e-commerce sales, in-store sales, payment processing, and now, in the near future, delivery fulfillment.
Here is what the company had to say about their new delivery initiatives, which they are rumored to be spending $1 billion on:
“Our smart inventory-allocation technology, powered by machine learning, predicts the closest fulfillment centers and optimal inventory quantities per location to ensure fast, low-cost delivery. After your customer completes checkout, Shopify Fulfillment Network takes care of everything else, while putting your brand and customer experience front and center.”
Tech buzzwords aside, there’s no doubt Shopify has added tremendous value to their user ecosystem. This will hopefully keep existing subscribers around, and attract more people to sign-up for their services. There’s also no doubt that Shopify’s valuation has skyrocketed in recent months. It is now trading at 31 times sales (I’ll talk more about the valuation at the end of the piece).
So, the question we are trying to answer is: Does Shopify have pricing power? To first do that, we need to look at their current offerings and user numbers.
How Shopify Makes Money
Shopify keeps it simple with what they charge customers. They have five subscription options, ranging from Lite ($9.99 a month) to Plus ($2,000 a month). Here are the costs for the middle three plans:
As you might expect, the more expensive plans have better features and charge less for payment processing. I’m not sure how popular each tier is, but according to the company, over 5,000 merchants use Shopify Plus and make up 26% of sales.
Another way Shopify makes money is having third-party developers sell applications on the platform. This healthy developer community keeps customers in-house and also provides a high-margin revenue stream.
Over 820,000 merchants use Shopify, bringing in $320.5 million in the first quarter of 2019. At a rough estimate, that means Shopify’s average-revenue-per-user (ARPU) is $130.28 a month.
Can Shopify Raise Prices?
I’m not sure Shopify wants to raise prices at the moment, but let’s go through their offerings to see if they ever could. Right now users enjoy a comprehensive platform with options to:
Sell products on your website, social media, mobile apps, basically any part of the internet (with analytics and management tools)
Sell in person with their new point-of-sale (POS) system
Advertise your business with different digit tools
Ship products at a discount with Shopify Shipping (and with new fulfillment centers coming out soon)
Process transactions with Shopify Payments
Raise money with Shopify Capital
2,700 3rd party applications
Since I don’t personally use the platform I’m having a hard time judging how much actual value they provide to users, but from what I’m seeing it is quite a lot. I can’t think of anyone, outside of maybe Square for payments processing, that has anything close to what Shopify offers right now. They have built an economic moat, one that seems to widen annually.
Since Shopify has all these options and a moat, I believe they do have tremendous “Netflix-like” pricing power that they will be able to implement over the next decade. Let’s see how that would impact their earnings statements in the years to come.
Extrapolation of Incremental Price Increases
Since Shopify has a tiered subscription service, we are going to base any estimated price increases on a monthly ARPU, which was around $130.28 at the end of Q1 2019. Total merchant growth will be based on the latest announcement of 820,000.
It’s tough to pin down exactly how fast the number of sellers is growing since they don’t release that data quarterly (from what I found at least). But apparently they added over 200,000 in 2017, so they must be growing around 20-40% YoY.
Here is a table of what Shopify’s total sales would be if they continue to add users and increase ARPU for the next five years. For our estimates, let’s assume they will grow sellers at a rate of 18%. Let’s also assume they can grow their ARPU at 10%. Both these numbers are completely arbitrary and might be a little conservative, but it is interesting to do the exercise nonetheless. Year (Q1)MerchantsARPURevenue Run Rate (billions)2019820,000$130.28$1.282020967,600$143.31$1.66420211,141,768$157.64$2.1620221,347,286$173.40$2.8020231,589,798$190.74$3.6420241,875,961$209.82$4.72
The Financials
If you’re looking at the far right column, remember that Shopify is a seasonal business with a ton of sales coming in the fourth quarter. So in 2024, their annual revenue would likely be around $6-7 billion and not $4.72 billion. With a $36 billion market cap as of today’s close, the stock looks mighty expensive right now.
I know a lot more goes into a stock than the P/S ratio. But even with fantastic gross margins and solid sales growth, it would take a lot of convincing, and probably a 30% price cut, for me to buy shares of Shopify right now. The business looks absolutely marvelous, but like most public SaaS companies, the price has gotten ahead of itself.
Disclosure: The author is not a financial adviser, and may have an interest in the companies talked about.