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Shopify Counting on Cannabis for Growth

Posted on Friday, Nov 9th 2018

According to a Grand View Research report, the global B2C e-commerce market is expected to grow 12% annually to $7,724.8 billion by 2025. The growth in the industry is attributed to increased disposable income levels and rising internet and smartphones penetration. Billion Dollar Unicorn Shopify is helping retailers establish and improve their dot-com presence to drive this growth.

Shopify’s Financials

Ottawa-based Shopify was founded in 2006 by Tobias Lütke, Daniel Weinand, and Scott Lake when they set up an online store, Snowdevil, to sell snowboarding equipment. When the three were setting up the store, they realized that there did not exist a service that allowed them to list their products on a number of marketplaces while retaining the ability to maintain their own brand and establish relationships with their customers. To fill this gap, the three set up Shopify.

Today, Shopify provides a cloud-based commerce platform focused on the SMB segment. It allows merchants to use their software to run their business across sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. Shopify helps its merchants get a single view of their business and customers across multiple sales channels. Businesses can leverage Shopify to manage products and inventory, process orders and payments, build customer relationships and conduct analytics and reporting.

Shopify recently reported its third quarter results that surpassed all market expectations. Revenues for the quarter grew 58% over the year to $270.1 million. It ended the quarter with a net loss of $23.2 million, compared with $9.4 million loss reported a year ago. On an adjusted basis, net income came in at $0.04 per share compared with $0.05 per share reported last year. The reduction in the net income was attributed to an increased spending on sales and marketing initiatives to increase market share and the establishment of its first brick-and-mortar store to sign up more entrepreneurs. The Street was looking for revenues of $257.2 million for the quarter with an adjusted loss of $0.04 per share.

By segment, Subscription Solutions revenues grew 46% to $120.5 million driven by an increase in the number of merchants joining the Shopify platform. Merchant Solutions revenues grew 68% to $149.5 million.

Among operating metrics, Gross Merchandise Volume for the goods sold through the platform grew 55% to $10 billion. Gross Payments Volume grew 41% to $4.1 billion.

Shopify expects to end the current year with revenues of $1.045-$1.055 billion and an adjusted profit of $8-$10 million. It expects to end the current quarter with revenues of $315-$325 million and an adjusted operating income of $16-$18 million. The market was looking for revenues of $328 million for the quarter and $1.06 billion for the year.

Shopify’s Growth Plans

During the last quarter, Shopify introduced several new features to help merchants. It launched Locations, a multi-location inventory platform that enables merchants to update and track inventory quantities across multiple locations from their Shopify account. It also introduced a new App Store that has been redesigned to make it easier for merchants to search for, evaluate, and install apps that help them grow their business. To leverage the growing potential of augmented reality, the company launched Shopify AR, which will help SMBs improve the mobile shopping experience by bringing products to life through 3D models shoppers over a mobile app.

It is also increasing its payment platform capabilities. During the quarter, it launched Shopify Payments and a local payment method in Germany that allows for bank transfers in addition to credit card payments. More recently, it announced the addition of Venmo as a payment option on its platform.

Shopify’s Pot Potential

The legalization of cannabis sale is a hot topic in Canadian retail industry. Shopify’s platform has been widely used by online sellers of recreational marijuana. Analysts believe that cannabis sales in Canada will be worth $5 billion in the current year. Shopify has managed to secure contracts with Government-run websites in Ontario and British Columbia along with other private players like Canopy Growth Corp., Aurora Cannabis Inc., and Hexo Corp. to support cannabis point of sale systems. The company will benefit from these contracts. On the first day of legalization, the demand for cannabis had already skyrocketed with Ontario Cannabis Store witnessing nearly 1.3 million visitors in the first 24 hours.

Within the cannabis segment though, Shopify faces stiff competition from Namaste Technologies, which not only sells medical cannabis and accessories but is also getting into a medical marketplace that will enable it to procure and sell medical cannabis products.

Shopify’s stock is trading at $148.19 with a market capitalization of $15.9 billion. It touched a 52-week high of $176.60 in July this year. The stock was trading at a 52-week low of $92.41 nearly a year ago. The stock had listed on the New York Stock Exchange in 2015 at $17 apiece with a valuation of $1.3 billion. Prior to the listing, the company was venture funded and had raised $122 million from investors including Felicis Ventures, Georgian Partners, Bessemer Venture Partners, FirstMark Capital, Insight Venture Partners, and OMERS Ventures. A $100 million round held in December 2013 had valued it at $1 billion.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.



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