Microsoft (NASDAQ:MSFT) is mulling the development of e-commerce tools for its cloud customers, according to a recent interview with Shelley Bransten, Microsoft's VP of retail and consumer goods, at The Information. Bransten stated that it was something Microsoft was considering "very seriously," which could be dire news for Shopify (NYSE:SHOP).
Shopify provides businesses with tools for building e-commerce websites, processing orders and payments, crafting marketing campaigns, maintaining customer relationships, analyzing data, and more. It bundles all those services together as a "one-stop shop" that brings offline businesses online.
Shopify, which was founded 15 years ago, enjoys a first-mover's advantage in this market. Its growth also remains robust -- its revenue rose 59% to $1.07 billion in 2018, and it anticipates 37% sales growth this year.
However, Shopify isn't profitable on a GAAP basis, and a growing list of similar services -- including Adobe's (NASDAQ:ADBE) Magento, Facebook's Instagram Checkout, and Square's Weebly -- threaten to derail its growth. Will Microsoft toss its hat into that ring and cause more headaches for Shopify?
Why Microsoft wants to offer Shopify-like services
Microsoft's core growth engine is its commercial cloud business, which includes Office 365, its Dynamics CRM (customer relationship management) and sales services, and its Azure cloud infrastructure platform, which stores data and powers cloud-based applications for enterprise customers.
Microsoft's commercial cloud revenues rose 48% annually to $9 billion last quarter and accounted for 31% of its top line. Within that total, its Office 365 Commercial revenues grew 33%, Dynamics 365 climbed 50%, and Azure surged 76%.
Azure mainly competes against Amazon (NASDAQ:AMZN) Web Services (AWS) in the cloud platform space. Azure generates less revenue than AWS, but it gained a growing list of retail customers -- including Walmart, Walgreens, and Kroger -- that see Amazon as the enemy.
Many of these large retailers have built their own e-commerce platforms. However, many smaller companies and a growing number of large companies -- including Tesla Motors, AB InBev's Budweiser, and Penguin Books -- use Shopify's e-commerce services. Shopify served 820,000 merchants worldwide at the end of 2018. Shopify Plus, its platform for larger businesses, had 5,300 customers.
Therefore, if Microsoft bundles Shopify-like e-commerce services into Azure, it could boost its revenues per customer, widen its moat against AWS, and ensure that its cloud business' fastest-growing segment stays healthy. Furthermore, Microsoft can integrate those services with Dynamics' sales, marketing, and CRM tools -- which would also make it a "one-stop shop" for digitizing a business.
Microsoft certainly has the market clout to pull that off. Windows is the world's top PC operating system, and Azure ranks second in the cloud platform market after AWS.
Should Shopify investors worry?
Shopify investors shouldn't jump to conclusions, since Bransten merely stated that Microsoft was considering the development of e-commerce tools to address rising demand from retail customers. This means that Microsoft won't launch a "Shopify killer" anytime soon, and that pent-up market demand could boost Shopify's sales instead.
Shopify's stock also trades at over 230 times its forward (non-GAAP) earnings estimate, so it's already pricey relative to its growth potential. Therefore, any news about potential rivals can rock this volatile stock.
Shopify's stock dipped after Adobe acquired Magento, its biggest e-commerce services rival, but that takeover didn't dent Shopify's growth over the past year. The stock slipped again after the recent news about Facebook, Square, and Microsoft -- although there's no proof that any of these services will do any more damage than Adobe-Magento. Investors should monitor all these developments, but they shouldn't assume that Shopify will simply roll over and let these rivals gain ground.