Top-line growth has never been a serious challenge for Shopify (NYSE:SHOP). Small entrepreneurs and major direct-to-consumer players alike increasingly appreciate the alternative to Amazon.com (NASDAQ:AMZN), which might have grown too big -- and too unwieldy -- for its own good. The sore spot for Shopify has been its bottom line. Its losses are expanding as the top line grows. That's a key part of the reason the stock's rally from earlier in the year came to a screeching halt in September.
The coming year could be a turning point for the company's profit trajectory, though, spurred by the convergence of multiple trends. Three stand out among the rest.
Shopify is at a fiscal turning point
Shopify's vision of helping companies of all sizes enter the e-commerce arena was cheered at its inception in 2004, but cheering doesn't pay the bills. As Shopify expanded, so did its losses. Last year's record revenue of $1.0 billion was paired with a record pre-tax loss of $64.5 million. Both extended well-established trends.
Analysts, however, believe 2020 will be the year revenue growth finally starts to outpace spending growth. Although projected to remain in the red, the coming year's expected GAAP loss of $140.4 million is less than this year's expected loss of $149.3 million. The following year is looking even more encouraging, with revenue growth driving major profit progress. The pros are looking at a loss of only $92 million then, with non-GAAP earnings expected to leap from 2020's $109.6 million to $207.2 million.
It's just an estimate, but it's an estimate from an analyst community that's been more likely to underestimate Shopify's earnings progress than to overestimate it. The outlooks also hold water, in that each major expense item and revenue only needs to maintain its current trajectory to reach those profit targets.
E-commerce is at its own tipping point
Driving that growth, of course, is the ongoing expansion of the e-commerce market itself.
It seems difficult to believe given years' worth of chatter about Amazon's impact on brick-and-mortar retailing and its dominance of the online marketplace, but online shopping still only accounts for about one-tenth of retail spending. That's changing though. This year's Cyber Monday drove a record-breaking $9.4 billion worth of e-commerce, which was up by nearly 20% from last year's level -- a multiyear record in its own right. Black Friday's online sales growth of 22.3% was even more impressive, albeit based on a smaller total dollar figure for e-commerce sales.
It's only anecdotal evidence, but the data points to a major shift in who's doing most of the shopping these days. Millennials, ranging in ages from their younger 20s to their older 30s, are reaching ages at which disposable incomes start to measurably grow. And they do more online shopping than any other demographic, with CouponFollow reporting earlier this year that they as a group make 60% of their purchases online. That proportion will only swell as the average consumer ages.
Sellers may be growing weary of Amazon
The same CouponFollow report also noted these same millennial online shoppers make about two-thirds of their e-commerce purchases through Amazon.com. But the Amazon juggernaut might have reached a point at which it's so large that its lost much of its appeal to sellers as well as to buyers.
Yes, the decision from Nike (NYSE:NKE) to end its official relationship with Amazon as a selling platform and do its own thing instead is one example of Amazon's fading importance to sellers (though bear in mind Nike wasn't the first name to say farewell to the e-commerce website). Amazon appears to have outgrown its ability to monitor its own website to combat lots of counterfeit goods, though some of its product reviews could be just as questionable. They're symptoms of sheer size, but they're also problems that ultimately motivate consumers to shop elsewhere.
Still not for everyone's portfolio, but...
It's on the right track. But a lack of actual earnings thus far makes Shopify a tough name to place in some portfolios when so many other reliably profitable companies are available to investors. Much can happen in the meantime that might alter its fiscal trajectory. Nothing seems to breed competition like the plausible promise of profits.
Just for the record though, Nike might have said goodbye to Amazon, but it's working with Shopify to evolve its direct-to-consumer offering. It would be short-sighted to see this as a glimpse of things to come or even of things that already are.