E-commerce software company Shopify (SHOP 1.11%) went public in 2015. But 2023 may have been the craziest year for shareholders yet. Revenue growth slowed and then reaccelerated. The stock has nearly doubled year to date after falling 75% in 2022. And management abruptly sold its logistics division after investing billions of dollars in the project.
The potentially game-changing surprises just keep coming for Shopify. On Aug. 30, the company announced that it had partnered with its biggest rival, Amazon (AMZN 3.43%). And investors rightly want to know if they can safely buy Shopify stock today, given all of the recent changes to the business. Let's dig further.
The Amazon deal
In 2022, Shopify acquired shipping logistics company Deliverr for $2.1 billion to better compete with Amazon. Just 364 days later, Shopify sold Deliverr. Now, it's reached a deal to offer Amazon's "Buy with Prime" product on sites powered by Shopify's software -- a product that extends Amazon's membership perks to third-party merchants.
Wall Street is increasingly calling this a win-win deal. Amazon wants to supercharge its next great business: shipping and logistics. Gaining access to Shopify's large merchant base will help it do so, hopefully justifying the massive investment it's made in logistics in recent years.
For Shopify, it's seen as a win as well. Although management was trying to approach logistics in a smart way, it was always seen as a low-margin opportunity. So investors are glad to see Shopify get out of logistics.
Moreover, when it sold Deliverr, Shopify CEO Tobi Lütke said, "Logistics was clearly a worthwhile side quest for us, and started to create the conditions for our main quest to succeed." In other words, logistics was viewed as a distraction from the company's mission. And if that's how management felt about it, then it's probably good to get rid of it.
While Amazon gets increased logistics business from Shopify, Shopify keeps a hold on payments, which is key. When shoppers use Buy with Prime through Shopify, it will be Shopify processing the payment, not Amazon.
Shopify's merchants can allow for multiple payment options at checkout, including PayPal's Venmo. But Shopify Payments has steadily grown since it launched -- it handled 58% of total merchandise volume on its platform in the second quarter of 2023, which was its highest penetration rate ever.
The higher penetration rate for Shopify Payments allows Shopify to benefit from a transaction in multiple ways, driving revenue growth. Payments are recorded in the company's merchant solutions segment. In the second quarter, this segment grew revenue by 35% year over year, which is strong.
Buy Shopify stock?
Trading at an expensive price-to-sales ratio of 13, Shopify must grow revenue substantially over the coming years for this to be a good investment today. And there are concerns for investors to be aware of when it comes to this point.
First, Shopify's revenue growth reaccelerated in Q2. But let's not take a victory lap just yet. Merchandise volume (the dollar amount of items purchased) was only up 17% year over year. The company increased its subscription prices during the quarter, which is a large reason why overall revenue grew 31% -- it's charging more.
SHOP Revenue (Quarterly YOY Growth) data by YCharts.
That's a growth lever that Shopify can only pull infrequently. The bigger need is to drive merchandise-volume growth. And this brings us back to logistics.
When Shopify went on its "side quest" of buying Deliverr to build out logistics, management said it was growing its Shop Promise product -- it was mentioned six times in that initial press release. With Shop Promise, consumers get a guarantee for fast shipping. But Shopify couldn't offer this guarantee to everyone due to restraints in its logistics capabilities. This was the problem it wanted to solve.
In February, Shopify's management boasted that its investments in logistics had allowed it to increase the availability of Shop Promise. And Shop Promise was leading to a 25% increase in shopper conversions, driving merchandise volume growth.
However, management suddenly isn't talking about Shop Promise anymore. There weren't any mentions in the press releases to sell Deliverr or to partner with Amazon. And it wasn't mentioned in Q2 results either.
In conclusion, partnering with Amazon can indeed be a win for both companies. But I'm concerned about how the narrative around Shop Promise appears to have changed. It is supposed to drive growth in volume for Shopify, which is important. But for some reason, it's not getting the attention right now.
Given how quickly the narrative keeps evolving, I'd wait on the sidelines with Shopify for now to allow management to provide greater clarity on its strategy.
