The rapid ascent of Shopify's (NYSE:SHOP) stock price has been remarkable. After a monster climb through 2019, the stock is close to doubling again year to date. Investors are more bullish on the company's prospects after it reported another quarter of 47% revenue growth as more businesses are turning to Shopify to open digital storefronts during the COVID-19 pandemic.
The first-quarter performance wasn't all rosy, though. Some merchants downgraded from the premium Shopify Plus subscription plan to lower-priced plans in March and April, but some have since re-upgraded. Additionally, while food and beverage merchants saw increases in gross merchandise volume (GMV), merchants that sell apparel and accessories experienced lower demand in mid-March, but apparel merchants started to recover in late March and into April.
Shopify is not providing guidance given the chaotic environment, but there are plenty of signs that it's solidifying its competitive position and should emerge from this crisis even stronger than before.
A paradigm shift for the retail industry
CEOs across different industries share one common view about the COVID-19 crisis: It is accelerating the digital trends that were already happening, especially the shift to e-commerce. Walmart CEO Doug McMillon recently told Business Insider that online pickup and delivery will become "part of the new normal" as more people experience the benefits of online shopping for the first time.
Shopify CEO Tobi Lutke described the current environment as basically 2030 moving up to 2020. During the first-quarter conference call, he said, "Everyone now has taken a 2020 quality software in a basically 2030 world."
His company's goal is to empower small businesses to succeed in a digital economy, which becomes more important every year as the giants like Amazon and Walmart continue to scale and grow their vast e-commerce infrastructure. These companies already have the capabilities in place to meet consumer needs online, but that puts even greater pressure on small merchants to catch up fast.
Many merchants are still discovering the value of Shopify's platform for the first time, as CFO Amy Shapiro explained during the first-quarter conference call:
More entrepreneurs than ever before are trying out Shopify with new store creations on our platform growing 62% between March 13 and April 24 compared to the six weeks prior supported by brick-and-mortar merchants moving online.
Shopify is even seeing large businesses show up on its platform. The famous ketchup brand from Kraft Heinz joined Shopify Plus recently, as well as the chocolate maker Lindt. COO Harley Finkelstein said, "This pandemic is forcing all kinds of merchants to rethink how they sell things, and Shopify Plus offers larger merchants the ability to move fast while managing costs, especially important at a time when economics are pressured."
Subscription revenue, including Shopify Plus, surged 34% year over year in the first quarter.
Shopify is a forward-thinking business, but it was caught off guard by the pandemic and has had to switch gears in a hurry. During the call, Lutke said, "I have intentionally asked the company very early in this crisis to delete all our existing plans and re-derive them from this new reality."
Part of the new plan involves unloading several new features to help merchants grow their businesses through this difficult time. At the Reunite virtual event on May 20, Shopify introduced Shopify Balance to help business owners better manage cash flow, bills, and expenses. The company announced several other features, including "Buy Now, Pay Later" and Shop Pay Installments, which will launch later this year. In late April, the company launched the new Shop app, which provides consumers with easier access to their favorite stores from a single app.
Shopify is also continuing to ramp up its Shopify Fulfillment Network. Management said the fulfillment network had its highest number of new merchant signings in the first quarter since it started. Additionally, Shopify shipped more volume for merchants in the first quarter of 2020 than in the fourth quarter of 2019. The company is currently sticking with its five-year timeline for growing the service, but management plans to begin significantly scaling fulfillment in 2021.
Shopify is just getting started
It appears there are more tailwinds than headwinds for this tech stock in the near term, which explains why the stock is hitting new highs. But clearly, with high unemployment and other macroeconomic disruption, it's uncertain whether the rest of 2020 will be as robust as the first quarter.
A telling detail that might have gotten overlooked in the recent earnings report is that Shopify increased the allowance for potential losses related to Shopify Payments and Shopify Capital due to the effects of COVID-19. This partly contributed to the company's net loss in the quarter, which widened from $24 million in the year-ago period to $31 million in the first quarter of 2020.
For what it's worth, analysts expect revenue in 2020 to be up 37% over 2019. And in 2021, that figure should hold steady at about 35%. Obviously, the expansion of Shopify Fulfillment could attract even more merchants next year, since it will provide a crucial service to help entrepreneurs compete with the efficiency of larger retailers. That, along with the various features that Shopify continues to introduce, could lead to another big year in 2021 and beyond.