At one point, Shopify (SHOP -5.62%) was one of the best stocks to own, as it skyrocketed almost 6,500% from May 2015 to its all-time high in November 2021. But as the Federal Reserve rapidly hiked interest rates, and investors soured on growth tech stocks, shares have cratered. As of this writing, they are down 61% from their peak.
You might be viewing this as a potential buying opportunity. Even so, it's a good idea to gain a better understanding about Shopify. Here are three things that the smartest investors know about this top e-commerce company.
How Shopify makes money
At a high level, Shopify is a tech platform. It provides tools and services that help merchants primarily sell things online. It also provides the tech infrastructure to let merchants accept in-store payments. The company says that it supports millions of businesses in more than 175 countries. But as of the end of 2022, 55% of its merchants were based in North America.
The business earns revenue from recurring subscription fees that it charges for access to its platform. The benefit for Shopify is that as its merchants grow larger, they can upgrade to more expensive plans. And it offers merchant solutions like payment processing, transaction fees, and advertising, among other things.
Growth has been outstanding. Between 2017 and 2022, gross merchandise volume (GMV) increased by 658%, with revenue up 732% during that same time. And in the recent first quarter, which ended March 31, GMV on the platform totaled $49.6 billion, up 15% year over year. Revenue of $1.5 billion and diluted earnings per share of $0.05 exceeded Wall Street analyst projections.
Near-term and long-term trends
Shopify has dealt with macro headwinds recently, like pressured discretionary spending by consumers, and a post-pandemic normalization away from online shopping. But the company is demonstrating that it has pricing power. Its attach rate, which measures the amount of GMV recorded as revenue, was 3.04% in the latest quarter. This was up both on a year-over-year and sequential basis. And it means that Shopify is able to extract greater fees from its customer base, a positive trend.
Zooming out a bit to look beyond near-term issues, it's clear that Shopify has a sizable long-term opportunity. According to data from the Federal Reserve, e-commerce commands just 15% of overall retail spending in the U.S., a percentage that has been climbing over the past two decades. And according to website technology tracker BuiltWith, Shopify has leading market share in the U.S. (29%) among e-commerce platform providers.
This puts the business in a great position to continue benefiting as online shopping becomes more popular. And by introducing new features and entering new markets, Shopify is poised to become an even more important platform that serves merchants across the world.
Rightsizing the business
Management announced the sale of Shopify's logistics segment to Flexport, a global supply-chain management business. Shopify's equity stake in Flexport will increase, and the latter will become the former's official logistics partner.
Shareholders likely viewed this news favorably, as Shopify's stock is up significantly since the first-quarter earnings announcement. The optimism is easy to understand. Logistics is generally a very capital-intensive business with a mostly fixed-cost structure. This means that it has made it harder for Shopify to achieve sustainable profitability, something that should be a bit easier ahead. In fact, management expects positive free cash flow in each quarter of 2023.
By shedding the logistics segment, Shopify can focus on its core business of serving as an invaluable e-commerce platform for merchants. Announcing layoffs of 20% of the workforce across the organization will also help to rightsize operations. That's a big part of why Shopify's shares are up 90% in 2023.
