Rumors about larger companies acquiring smaller upstarts are not uncommon, and in the majority of cases, investors would do well to ignore the gossip mill. Sometimes, however, investors can gain valuable insight, and it's worth taking the time to examine the story to see if the combination would be a winning fit.
When rumors surfaced last month that e-commerce facilitator eBay Inc. (EBAY 1.67%) was looking to acquire Shopify Inc. (SHOP 0.39%), it seemed plausible; Shopify's stock jumped on the news. After all, both companies are engaged in the realm of online selling, and at first glance, it seems like it might be a good match. A closer examination, however, shows that looks can be deceiving.
If you haven't heard of Shopify, you're probably not alone. The company went public less than two years ago, but the stock has been on fire ever since. Shopify provides an e-commerce and payment platform to small and medium-sized businesses that is easy to use and provides over 1,000 apps that allow them to customize the platform for an experience that will best suit their shoppers. This software-as-a-service platform can be easily accessed on a variety of devices and can be used to monitor inventory, make sales, and process payments. Not having to worry about these issues lets the owner focus on the business.
Shopify has grown revenue in excess of 86% year over year in every quarter since going public in mid-2015, and growth in gross merchandise volume (GMV) has exceeded 100% in six of its seven quarters. Adding to its competitive advantage is the endorsement of its product by Amazon.com, Inc. (AMZN 2.14%), which shuttered its Amazon Webstore and recommended that its merchants migrate to Shopify's platform. Having the blessing of the e-commerce pioneer is no small feat. Facebook, Inc. abandoned its own plans to develop an e-commerce platform and partnered with Shopify as well.
Shopify won't move the needle for eBay
The acquisition of Shopify may seem like it would help the lumbering giant eBay in the growth department, which increased GMV by only 2% and revenue by 4% in its most recent quarter, a far cry from Shopify's growth of 100% in GMV and 86% in revenue. However, Shopify's revenue increasing from $70 million to $130 million barely registers compared to eBay's revenue growth from $2.1 billion to $2.2 billion.
In its most recent quarter, eBay's revenue was $2.2 billion, with GMV of $20.9 billion, which dwarfs the $130 million revenue and $5.5 billion GMV at Shopify. Even if its torrid growth were to continue, it would be some time before Shopify's results were anything more than a drop in the bucket to eBay.
If eBay were to decide that it wanted Shopify, it wouldn't come cheap -- eBay would have to pay up for that kind of growth. Shopify currently has a market cap of about $7 billion. eBay wouldn't be able to buy it for that price, however. It would be logical to assume that a 20% or even 30% premium might not be enough. Assuming a 40% premium, eBay would have to pay up to $10 billion for the still young company, and that's assuming they would even sell.
Shopify might be a good fit for a company like eBay -- or even Amazon, for that matter -- but at some point a company has to consider the economics of a prospective purchase. Another consideration would be the company culture. Shopify's young snowboarder culture might not be a good fit under eBay's wing.
Is eBay even interested?
There isn't any concrete evidence that eBay is even interested. Rumors surfaced and Shopify's stock jumped on the news, but that doesn't mean an acquisition is imminent. Investors should consider that eBay has been divesting itself of several non-core businesses lately, including both its enterprise unit and PayPal Holdings, Inc. in July 2015, shortly after Shopify went public.
In a more recent move, eBay sold its position in MercadoLibre, Inc. (MELI 2.37%), the leader in Latin American e-commerce, in October of last year. eBay acquired a 19.5% stake in its smaller rival in 2001, after trying to compete in the region for a time. MercadoLibre, which means "free market" in Spanish, was originally modeled after eBay, which mentored the company for years. It seems odd that eBay would divest one leading e-commerce platform, only to turn around and buy another one, though stranger things have happened.
Probably won't happen
All things considered, it is unlikely that eBay would buy Shopify. Never say never, but it would likely require a much greater return on its investment. eBay could certainly swing the deal if it wanted to, but there isn't any indication it does.