Of all the companies reporting earnings over the past week, none was of more interest to me than BigCommerce (BIGC 4.56%). Trotted out by many -- including some here at The Motley Fool -- as "the next Shopify (SHOP +3.69%)," I wanted to see if the company could live up to the hype in its first quarter as a public company.
My verdict: As I suspected, this is definitely not the next Shopify. But -- and this is really important -- that doesn't necessarily mean it will be a losing investment. It just means we need to set our expectations for this software-as-a-service (SaaS) stock accordingly.
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Shopify is in a league of its own
Let's start with the most obvious and important fact: Shopify is orders of magnitude larger than BigCommerce. We already know that Shopify serves roughly 15 times more businesses via its platform than BigCommerce, and it collects roughly 15 times the sales. At over $110 billion, Shopify also has a valuation over 20 times the size of BigCommerce's valuation.
Given these factors, it would be entirely reasonable to assume that BigCommerce was growing faster. When you're working off of a smaller base, that's much easier to do. And yet, when we dig into second-quarter results, that's not the picture that emerges.
| Metric | BigCommerce | Shopify |
|---|---|---|
| Total Revenue | $36 million -- 33% growth | $714 million -- 97% growth |
| Subscription Revenue | $24 million -- 19% growth | $196 million -- 28% growth |
| Annual Recurring Revenue (ARR) | $152 million -- 32% growth | $684 million -- 21% growth |
| ARR from Large Clients* | $80 million -- 44% growth | $199 million -- 35% growth |
Data source: SEC filings. "Large Clients" are those identified as "Enterprise Clients" by BigCommerce, and those using "Shopify Plus" for Shopify. Shopify ARR calculated by multiplying Monthly Recurring Revenue by 12.
As you might be able to tell, this isn't an apples-to-apples comparison. Shopify, for example, creates lots of low-margin revenue through its merchant services. Even so, I believe there's more than enough here to prove something out: BigCommerce's growth is solid for a small company, but compared to what Shopify is doing -- at Shopify's current size -- BigCommerce is simply not in the same league.
Not only that, Shopify's war chest (a net cash position of over $4 billion, with positive free cash flow) give it infinitely more flexibility than BigCommerce (negative net cash position and negative free cash flow).
Two unbeatable Shopify advantages
When it comes to long-term dynamics, I think Shopify also has the upper hand, in two key ways. First, it has recently expanded to include fulfillment services. It's just one example of what that big war chest can enable. This is an enormous undertaking currently dominated by the likes of Amazon and Walmart. By giving merchants a third option that isn't going to (potentially) take business away, Shopify is a highly coveted partner that isn't easily replaced.
The second advantage has to do with the pipeline of new customers. BigCommerce is currently focused on larger corporate clients, while Shopify is geared toward small and medium-sized businesses (SMBs).
Shopify's merchant count -- currently over 1 million -- has come under scrutiny in the past. The criticisms are not without merit: Some people sign up just to get a small commission, and never sell anything via the platform.
But this misses the bigger point. By capturing tens of thousands of SMBs, Shopify is tilting the scales in its favor: The more SMBs it has today, the more likely it is that it has the next breakout brands of tomorrow. And because there are wide moats surrounding those businesses, they'll likely stick with Shopify when they grow to scale. BigCommerce, while it offers cheaper plans for SMBs, simply doesn't have the pipeline to cast such a wide net.
But owning BigCommerce might still make sense
All of this being said, I don't necessarily think BigCommerce shareholders are putting their heads in the sand. The company's "open SaaS" network and its particular focus on business-to-business e-commerce could allow it to dominate a certain niche.
Further, it would be silly to think there will only be one -- or even just a few -- winners when it comes to e-commerce platforms. Shopify's success need not necessarily mean BigCommerce's failure.
What's important here is that we set reasonable expectations. I don't see any evidence right now that BigCommerce could reach Shopify's size within a decade's time. Of course, I could be wrong. But if you assume such success isn't possible, invest in BigCommerce anyway, and hold throughout -- there's nothing but upside for shareholders.
I won't be buying shares myself, but I won't be rooting against the company either. The more players we have in the space, the more people can benefit from the shift to e-commerce.
