In the business and investing world, analyzing competitors is key. It’s just absolutely essential to know, in which competitive environment a company is operating.
People often ignore, how important and healthy it is for businesses to have rivals. An enterprise cannot really become successful without at least one fierce competitor.
I mean just look at the two “arch rivals” Coca-Cola and PepsiCo. PepsiCo has been Coca-Cola’s primary competitor for over 110 years and both have become hugely successful. Not despite, but BECAUSE OF FIERCE COMPETITION BOTH HAVE BEEN THRIVING.
In Europe, one can often hear, that “grocery store XYZ had been crushed by competition of German grocery giants Lidl or Aldi”.
Well, is it really the case that Aldi, Lidl, Walmart or Amazon, etc. put smaller grocery businesses out of business?
Let’s just think about it. Could it be that many grocery stores have been extremely slow to adapt to changing customer needs, client expectations, and new technologies? Couldn’t it be that their cost structure, strategic positioning, and marketing approach are not ideal any longer? Wouldn’t it be much more constructive to embrace competition and trying to learn from the new behemoths?
Now, let’s have a look at a wonderful company that would not be as nearly as successful without the existence of another company. I am talking here about Shopify. That business is THE PRIMARY BENEFICIARY of huge pressure Amazon puts on many small and medium-sized businesses around the world.
Shopify Inc. is a Canadian e-commerce business. In fact, Shopify delivers the tech infrastructure and services including payments, marketing, shipping, and customer engagement tools to simplify the process of running an online store for small merchants (retailers with less than 500 employees).
I wouldn’t see Shopify as Amazon’s primary competitor. Instead, it’s a company that thrives amid the rise of Amazon.
Shopify at its core is an online platform, it allows virtually anyone to establish, run and operate an online (retail) business. Shopify entered the market back in 2006 and its growth has been explosive. Today, Shopify sports a market cap of well above USD 140 Bn. and has 1.7 Mio. merchants across the globe.
Particularly interesting – in addition to the fact that it operates in the tailwind of Amazon’s huge success – are the following factors:
Shopify’s business model builds massively on partnerships
While Amazon is like an empire, insourcing as many services and competencies as possible, Shopify boasts partnerships with several businesses and platforms including Facebook, Instagram, Pinterest, Amazon, Alibaba (Alipay), and Tik Tok, etc., giving users to the possibility to sell nearly to anyone.
In fact, from an early stage, Shopify’s product innovations were built on partnerships, as the graph below clearly shows (source: Shopify Q1 2021 Financial Results presentation, slide 12, Merchant-First Focus Through Product Innovation).
The advantage of Shopify’s partnership approach is clear. They
- are lowering the barriers for their customers to enter into the market and to use Shopify’s platform,
- they are benefit from synergies and simplify operations and
- catalyze merchant sales.
Shopify operations are extremely capital light
Internet-based business models are often capital-light but Shopify really is a breed of its own kind.
It’s hard to find another e-commerce platform that is more scalable than the one of Shopify. Yes, the business is making huge investments into their platform, product innovation, marketing, etc. But the growing traction of their merchants is incredible and leads to extreme revenue and profit growth.
Shopify’s subscription offer is very simple and compelling. For instance, a merchant (the company defines it as a retailer with less than 500 employees) can use Shopify’s services for a basic fee of USD 29 per month and benefit of one single integrated back-office providing marketing, payments, fulfillment, etc. Larger brands like Heineken, General Mills, Kraft, etc. usually go with the subscription model “Shopify Plus”, they pay USD 2’000 per month and have a broad array of tools and services they can use.
Now when we look at a 45 % growth of the Monthly Recurring Revenue (MRR) from these subscriptions, that’s an amazing number. Just think of that: Shopify grew that Monthly Recurring Revenue by 45 % on average year by year since 2016.
Shopify just has to keep that growth momentum and one can already see that not much additional investment is required to multiply the revenue base over the next few years which immediately translate in huge profit growth.
Shopify’s stock looks expensive
There are few tech companies that have seen their shares shooting up so strongly as Shopify.
I am not a big fan of the often-used narrative that tech stocks are mostly overvalued, because it’s not rare that you can easily see this is not the case. I am thinking here of Alphabet, Facebook, and Amazon in particular.
Now let’s have a look at how Shopify’s stock has been moving in relation to Earnings Per Share (EPS) lately.
Shopify really became hugely profitable after the “2020 COVID-pandemic year”, as the first quarter of 2021 clearly shows. EPS stands at over USD 10, compared to a loss of – 0.27 in the same quarter one year ago.
Now, let’s assume, Shopify is able to achieve at least USD 10 in all four quarters in 2021, which brings the total EPS for the year to 40 and the Price-Earnings-Ratio (PE-Ratio) to roughly 30, given the current stock price of around USD 1’200.
Now, ask yourself, whether a PE-Ratio clearly below 50 is expensive for a hyper-growth company like Shopify.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.