Shopify IPO to Value Company at $1 Million

Canadian-based ecommerce platform supplier Shopify filed for an IPO in the USA and Canada last month hoping to raise $100 million. The evaluation is expected to come in at $1 billion. The Business will be listed on both the New York Stock Exchange and the Toronto Stock Exchange.

Launched in 2004, Shopify introduced its cloud-based ecommerce platform for small and medium-sized companies in 2006. Offerings now include ecommerce site development, payment processing, marketing tools, and inventory management tools.

In its F1 filing with the SEC, Shopify reports that as of March 31, 2015, it’d 162,261 merchants from approximately 150 countries using its platform, growing 68 percent over March 31, 2014. In 2014, the platform processed Gross Merchandise Volume, (GMV) of $3.8 billion, representing an increase of 133 percent over 2013.

Shopify Financials

The business has been undergoing rapid growth over the previous three decades. Revenue rose from $23.7 million in 2012, to $50.3 million in 2013, to $105 million in 2014. Year-over-year growth rates were 112 percent and 109 percent respectively. Yet Shopify has never attained a gain and losses have increased annually — from $1.2 million in 2012, to $4.8 million in 2013, to $22.3 million in 2014. As of March 31, 2015, Shopify had an accumulated deficit of $33.6 million.

The business requires an injection of funds to offer new services and products in addition to bolstering marketing efforts. Sales and marketing expenses increased $3.8 million, or 39 percent for the three months ended March 31, 2015 compared to the same period in 2014, largely due to an increase of $2.5 million in advertising program expenses like Google AdWords and ads on social networking.

Revenue Model

Shopify receives most of its revenue from sales of subscriptions to its platform. Additionally, it gets payments for domain name registration and sales of store topics and internet applications. The business also garners revenue from merchant solutions — payment processing fees out of Shopify Payments, transaction fees, partner referral fees, and sales of POS hardware. Merchant solutions supplement the platform by adding value in the kind of related services demanded by merchants.

In the first quarter of 2015, subscription services included 60 percent of Shopify’s total earnings, versus 69.4 percent in the first quarter of 2014.

Shopify Payments, released in 2013, is the catalyst for both the growth in revenue from merchant solutions in addition to costs. According to the filing,”Gross profit margins on merchant solutions are usually lower because of the associated third party costs of providing these solutions. Because of this, the introduction of Shopify Payments and the consequent change in the mix of revenue sources has influenced our overall gross margin. More specifically, while our total revenues have increased in recent periods as a result of supplying Shopify Payments, our overall gross margin percentage has decreased in such periods.”

While merchant solutions revenue increased from $11.9 million in 2013 to $38.4 million in 2014, cost of revenue in the same period increased from $5 million at the $26.4 million. For the first quarter of 2015, merchant solution revenue was $15 million while costs were $10.7. This adds some urgency to the need to raise more money.

Keeping Up with a Changing Economy

A challenge for all platform suppliers would be to maintain increasingly intricate selling scenarios. By way of instance, Shopify has put a whole lot of effort into providing an omnichannel platform which allows merchants sell products via sites, social networking storefronts, brick-and-mortar shops, and pop-up stores. Additionally, it enables commerce from smartphones and tablets. Presently, half of Shopify’s merchants’ storefront traffic comes from mobile devices and one quarter of Shopify’s clients have a Facebook shop.

Shopify is going head-to-head with rival Bigcommerce, which will be buying Zing, a startup which makes checkout software and stock management tools for brick-and-mortar companies. Bigcommerce has 85,000 clients, roughly half the amount Shopify has. Over the last year, Bigcommerce has formed partnerships with companies like Square and Lightspeed POS allowing them to provide Bigcommerce’s applications to physical retail stores. Bigcommerce is also expected to go public, possibly later this year. Another important Shopify competitor is Magento, eBay’s ecommerce platform.

The successful IPO of Etsy — see my post “Can Etsy Maintain Artistic Roots with IPO?” — bodes well for Shopify and other ecommerce companies seeking to go public. Etsy closed its opening day of trading at $30 per share, 86 percent over its initial price of $16 per share. The company raised over $287 million and the business was valued at almost $1.8 billion. Etsy is currently worth more than $3.5 billion.