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Shopify Delivering Robust PaaS Strategy

Posted on Tuesday, Mar 19th 2019

According to a 2018 Research and Markets report, the global B2C e-commerce market is expected to maintain double digit growth through 2021. Ontario-based Shopify (NYSE:SHOP) is a leading cloud-based commerce platform that helps SMBs run their business through both physical and digital storefronts. 

Shopify’s Financials

Shopify recently announced its fourth quarter results that surpassed market expectations. Revenues for the fourth quarter grew 54% over the year to $343.9 million. Net loss for the quarter was $1.5 million, or $0.01 per share. Adjusted net income was $27.9 million, or $0.26 per share. The market was looking for revenues of $327 million with an EPS of $0.21.

Shopify earns its revenue through two segments – subscriptions and merchant solutions. Subscription solutions are priced in tiers ranging from $29 a month to $2,000 a month. The basic subscription provides services ranging online stores, 24×7 support, and manual order creation. The higher end subscription services offer advanced analytics capabilities. Its merchant solutions includes the shipping and payments capabilities. For the recently reported quarter, subscription solutions revenues grew 42% to $133.6 million and Merchant Solutions revenues grew 63% to $210.3 million.

Among other operating metrics, Shopify’s monthly recurring revenue grew 37% to $40.9 million with Shopify Plus contributing $10.4 million. GMV for the fourth quarter grew 54% to $14 billion and Gross Payments Volume grew to $5.8 billion.

Shopify ended the year with revenues of $1.07 billion and a loss of $0.61 per share.

For the current quarter, Shopify expects revenues of $305-$310 million. It is looking to end the current year with revenues of $1.46-$1.48 billion. The market was looking for revenues of $308 million for the quarter and $1.473 billion for the year. Shopify does not provide an earnings guidance.

Shopify’s International Expansion

Shopify’s growth is attributed to its focus on growth initiatives to attract merchants and combat competition from rivals like Amazon and eBay. Last year, it added several features to its platform focused on the international markets. It launched native language capabilities on its platform and now supports seven languages globally including English, German, Japanese, French, Spanish, Brazilian Portuguese, and Italian. It also expanded its payments solution Shopify Payments to international markets. Shopify Payments is now available in 11 countries. The newly added countries include Spain and Germany.

Shopify had launched its payment service through a partnership with Stripe. Together it built an in-house credit card processor, Shopify Payments, that is available as an option for merchants to select, in addition to other third-party gateways including PayPal. If a merchant signs up with Shopify Payments, they don’t have to integrate a third-party processor or coordinate payments with a separate company. Shopify Payments is still a fledgling compared with PayPal. For starters, PayPal operates in more than 200 countries, and Shopify Payments just made it to 11.

Shopify plans to focus on the international growth markets by continuing to invest in these markets in the current year. It claims that the current year will be a learning year for these investments and expects to reap benefits in 2020.

Meanwhile, Shopify continues to expand its existing platform with innovative offerings. It is focusing on the development of more advanced enterprise-level features and functionality, such as Launchpad, Scripts, and Flow. These tools will help merchants upsell, customize, and work more efficiently. Launchpad will help merchants plan and automate flash sales, product launches, and sales campaigns. Scripts will allow them to optimize their e-commerce checkout by automating discounts and promotions. Flow will allow merchants to automate repetitive tasks such as reordering inventory.

Shopify’s Platform Expansion

Shopify built its own platform-as-a-service on top of Kubernetes called Cloudbuddies. Inspired by Heroku, Cloudbuddies extends the Kubernetes API and helps manage processes such as creating DNS records, configuring cluster/user quotas, and setting security rules. It has been influential in driving the success of the new platform. It has opened its platform to third parties and allows them to build apps that offer several niche services to Shopify’s existing merchants. The platform offers a strong level of pre-existing integrations and third party extensions that have helped build a strong network.

Today, Shopify offers more than 2,500 apps, most of which cannot be bought anywhere else. For instance, Antram’s Sale Price Adjuster allows businesses to update sale prices of their products by quickly adding or removing discounts from all or a portion of their products. Apps like Transportr help simplify the move from other platforms to Shopify. It prevents losses on account of unhandled 404 errors by identifying them in real-time and correcting them. Other services available on Shopify’s platform help add capabilities such as search, payments, loyalty, and reviews.

As I have written earlier, Shopify’s PaaS strategy will stand it in good stead. All cloud companies need a PaaS strategy to drive growth through acquisitions and integrations in the future.

The market is pleased with Shopify. Its stock is trading at $205.98 with a market capitalization of $22.8 billion. It touched a 52-week high of $209.59 earlier last week. The stock was trading at a low of $112.50 in April last year. The stock has delivered robust growth since it listed in 2015 at $17 at a valuation of $1.3 billion. Prior to the listing, it 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 Shopify at $1 billion.

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