Back in the early 2000s, as Amazon scaled its marketplace, it began providing cloud infrastructure services to third-party sellers. At first, this platform was meant to facilitate Amazon's ambitions in e-commerce, but it eventually became something much bigger. Today, Amazon Web Services (AWS) is the No. 1 cloud computing platform in the world and the chief driver of Amazon's operating profits.
Shopify (SHOP +0.15%) takes a different approach to commerce, but it would still benefit from a similar transition into cloud computing. For that reason, the company should consider acquiring DigitalOcean (DOCN +10.77%), a cloud vendor that tailors its products to the needs of small and medium-sized businesses (SMBs) and individual developers.
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A common business model
Shopify makes commerce easier. Its software helps merchants manage sales across physical and digital locations, and it offers an expanding number of services, from payment processing and discounted shipping to money management and marketing. It's even building an AI-powered fulfillment network across the U.S. that will help its merchant clients deliver orders more quickly and cost-effectively.
Sound familiar? Amazon provides a similar set of services to its own third-party sellers, but with one key difference. It groups those merchants into a single marketplace, making it difficult for them to differentiate themselves. By comparison, Shopify gives SMBs the tools to promote their own brands and build lasting customer relationships.
DigitalOcean would fit perfectly with that business model. The company simplifies cloud computing with a click-and-go user interface, eliminating the technical complexity that typically comes with products from legacy vendors. With DigitalOcean, SMBs can deploy resources quickly, without any formal training. The company also provides 24/7 live support to all its customers.
Moreover, Shopify already hosts its merchants' websites, meaning it already manages compute, storage, and database services on their behalf. Buying DigitalOcean would provide it with a more robust data center infrastructure, increasing its capacity to support merchants. It would also open up opportunities for cross-selling in both directions. Specifically, Shopify could provide payment processing or logistics services to any of the 598,000 clients on DigitalOcean's platform; and DigitalOcean could offer cloud services to any of the 1.7 million businesses powered by Shopify.
Collectively, the revenue synergies could move the needle in a big way. Research company Gartner believes public cloud spending will jump by 21.7% to $482 billion in 2022. And Shopify puts its addressable market at $153 billion. However, that figure only includes SMBs, which brings me to my next point.
The benefit for large enterprises
Here's one more reason this move would make sense. Today, Shopify primarily targets SMBs with its marketing efforts, but it's also gaining traction among bigger enterprises. Shopify Plus -- a more flexible commerce platform designed for larger sellers -- has been adopted by over 10,000 clients, including General Electric, McCormick, Netflix, and PepsiCo. If Shopify supplemented its commerce software with cloud computing services, I think the company would see a significant uptick in demand from that segment of the market.
For instance, DigitalOcean offers security services like cloud firewalls and virtual private clouds, as well as developer tools and managed databases. Those products allow enterprises to build and deploy mobile applications, software-as-a-service, video games, or streaming platforms. And in all cases, Shopify could streamline its clients' businesses by processing payments on their behalf, in addition to providing point-of-sale software.
The next chapter
To be clear, this is nothing but speculation. Shopify's management has never expressed any interest in cloud computing -- but I think it makes sense. DigitalOcean's market cap currently sits at $11 billion, and Shopify already has $7.5 billion in cash and securities on its balance sheet, so funding such an acquisition wouldn't be terribly difficult. More importantly, the potential synergies could transform Shopify's business in much the same way AWS has transformed Amazon.
Given all that, I wouldn't be surprised if cloud computing was the next chapter in Shopify's growth story.
