Shopify (SHOP 2.08%) is a complete e-commerce platform that allows an individual to set up, grow, and manage their online business. The platform provides an end-to-end experience for business owners with a wide range of tools that can manage products, track inventory, process payments, schedule shipping, and more. The value of this offering in a time of rapid e-commerce growth has contributed to Shopify's success with its merchants, which numbered over one million in 2019.
The highly successful rollout and adoption of the Shopify platform is evident from the company's market performance, as its stock has climbed from a 2015 IPO price of $17 per share to nearly $470 as of this writing. With shares exploding upward in almost a straight line, investors must be wondering if the stock is still a good buy near its all-time high. Let's look at three reasons why Shopify's growth story is far from over.
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Growing GMV
Gross merchandise volume, or GMV, is the value of all products sold by merchants on Shopify's platform. This metric has grown from $7.7 billion in 2015 to $41.1 billion in 2018. And in the first nine months of 2019, GMV stood at $40.5 billion, meaning the company generated in just three quarters nearly the same volume of sales on its platform as the entire previous year.
Along with GMV growth, in December, Shopify announced that merchants on its platform collectively sold $2.9 billion of goods over the Black Friday to Cyber Monday weekend. This was a more than 60% increase year over year from 2018. And this might just be the beginning with more GMV to flow through Shopify's platform going forward. The company only had a 4.7% share of U.S. retail e-commerce sales in 2018. This put Shopify in the third position behind eBay and Amazon, which boasted 6.8% and 35.9% market shares, respectively.
The strong growth in merchant accounts, together with rising GMV, is a clear indication that Shopify's platform is gaining prominence among e-commerce businesses.
And growing GPV
As part of Shopify's integrated offering, merchants can choose to accept payments through Shopify Payments, which creates a seamless process for business owners as they can easily manage aspects of their business through a single platform. While Shopify Payments is not used by all of the company's merchants, adoption is growing as you can see in the table below:
| Year | Gross Payment Volume | % of Gross Merchandise Volume |
|---|---|---|
| 2015 | $2.7 billion | 35% |
| 2016 | $5.9 billion | 39% |
| 2017 | $10.0 billion | 38% |
| 2018 | $16.6 billion | 40% |
| 2019* | $16.9 billion | 42% |
Data source: Shopify financial filings. *2019 figures for the first three quarters of the year.
The growth in GPV, both on an absolute basis and as a percentage of GMV, is due to the benefits associated with the service. Besides being fully integrated into a merchant's online store, Shopify Payments also offers lower costs since participating merchants pay only the credit card fee. However, third-party payments require merchants to pay both the card rate and a Shopify subscription fee.
By creating an integrated platform, Shopify can fully entrench its customers with the platform as long as the business is doing well.
Not resting on its laurels
Despite the strong growth Shopify has enjoyed year after year, the company isn't resting on its laurels. Last June, it announced the Shopify Fulfillment Network (SFN). Shopify is building out a dedicated network of fulfillment centers that will be used to house merchants' goods -- this allows SFN to quickly ship these goods and fulfill orders as quickly as possible. By bringing on more of its merchants into the network, Shopify can also help lower shipping costs with greater economies of scale.
An analyst from Rosenblatt Securities estimates that SFN will generate $300 million of fulfillment revenue in 2021, with that figure growing to $6 billion by 2025. If these estimates from Rosenblatt prove to be accurate, in five years, SFN alone could contribute four times the amount of revenue the company expects to generate in 2019.
Shopify's fulfillment centers will be state of the art, running on an AI-platform utilizing smart inventory allocation. The company is pretty serious about rolling out a technologically advanced system as it spent $450 million last year to acquire 6 River Systems, which is focused on fulfillment automation for e-commerce and retail operations. Management commented on the deal during the third-quarter earnings call, "With the 6 River Systems acquisition now closed, we are better positioned to deliver faster high quality fulfillment. Once implemented, we expect to expand throughput and capacity at our partner nodes boosting productivity by two to three times that of manual processes."
This acquisition should fast-track Shopify's push into the fulfillment business. The company has already rolled SFN out to a select group of merchants. To this end, Shopify mentioned the following in its third quarter call, "We are seeing strong demand and continue to add select merchants and partners as we focus on high performance and optimizing for the merchant experience."
SFN will add yet another layer of utility for merchants on the Shopify platform and should attract more merchants to come on board (or stay loyal to the platform). The rollout of SFN also presents another challenge for competitors to overcome.
Since its market debut in 2015, Shopify has generated incredible returns for its shareholders. However, the tailwinds the company is riding are far from over. Continued growth of GMV and GPV, on top of new initiatives like SFN, will fuel the stock's outsized returns well into the future.
