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Shopify Goes on the Defensive with Amazon

Posted on Friday, Jun 28th 2019

Ontario-based Shopify (NYSE:SHOP) continues to expand its B2C offerings and is now getting ready to take on Amazon. To drive revenue growth, Shopify is looking to invest heavily in the US fulfillment business – a market currently dominated by Amazon. But that is a highly capital intensive strategy to compete with a giant like Amazon.

Shopify’s Financials

Shopify’s first quarter revenues grew 50% over the year to $320.5 million, significantly ahead of the market’s forecast of $310 million. EPS of $0.09 was also ahead of the Street’s estimated $0.05.

By segment, subscription solutions revenues grew 40% to $140.5 million, driven by growth in Monthly Recurring Revenue and the addition of several new merchants. At the end of the March quarter, MRR revenues grew 36% over the year to $44.2 million.

Merchant Solutions revenue grew 58% to $180 million, driven by growth in 50% growth in GMV to $11.9 billion.

Among other metrics, Shopify Capital cash loans to merchants grew 45% to $87.8 million. Gross Payments Volume on its platform grew 63% over the year to $4.9 billion, accounting for 41% of GMV processed in the quarter.

For the current quarter, Shopify expects revenues of $345-$350 million, compared with the market’s forecast of $347.02 million. Shopify expects to end the current year with revenues of $1.48-$1.50 billion, compared with the Street’s forecast of $1.47 billion.

Shopify’s Offering Expansion

Shopify continued to drive market expansion through the launch of additional services. During the quarter, it added language capabilities to its platform to make it more merchant friendly. It is currently running a limited beta version of its services in Simplified Chinese and Dutch language. The Shopify platform currently already includes English, Brazilian Portuguese, Japanese, German, Spanish, French, and Italian language capabilities.

Besides language, Shopify is also looking at attracting international merchants through a multi-currency feature that it rolled out as part of its Payments offering. The service will allow merchants to sell in several currencies and receive payments in their respective local currency.

Shopfiy has also recently introduced Shopify Studios, a production house with film content development and full-service TV capabilities. It is also expanding its hardware capabilities to cater to the POS needs for merchants. It recently introduced products such as Dock and Stand, and Tap & Chip Reader so that merchants can provide a better retail experience to their customers. For better marketing services for its merchants, it announced an integration with Snap which will allow merchants to utilize Snapchat’s Story ad campaigns for marketing.

Shopify’s Fulfillment Solutions

To keep up with Amazon, Shopify recently announced fulfillment solutions for retailers. It is planning to invest $1 billion to set up a network of fulfillment centers in the US to provide its merchants with lower warehousing shipping rates. The fulfillment service will not only help merchants cut down on their shipping and fulfillment costs but will also generate a new line of revenue for Shopify’s Merchant Solutions business.

Shopify’s fulfillment network will be available as an early-access offering to US customers. It will allow merchants that ship 10 to 10,000 packages daily to use its fulfillment centers. Unlike Amazon, Shopify’s e-commerce platform integrates into merchant websites, making it simpler to process the transaction.

Amazon offers fulfillment services through its Fulfillment by Amazon segment. I spoke with Ethan McAfee, the CEO of Amify, earlier this month, who gave interesting insights into Amazon’s fulfillment business. Today, Amazon is the largest shipper of products in the United States. Its title helps it get good deals on shipping rates that they pass on to their marketplace vendors.

According to a 2018 Zebra Technologies study, 78% of logistics companies expect to provide same-day delivery by 2023, and that 40% percent anticipate delivery within a two-hour window by 2028. And, Amazon’s same-day delivery and two-hour delivery reach continues to grow. Amazon also benefits from its rapidly growing e-commerce presence. As Amazon continues to accelerate its delivery time, it will not only take market share away from other e-commerce players but also from other brick-and-mortar players.

As Ethan said earlier, customers choose Amazon because of the price of the product it offers, ease of transaction on the platform, and the quick, efficient, and great customer service that it offers. Merchants also prefer Amazon because of its reach and because services like Shopify cost a lot more to drive traffic, have higher warehousing costs, and don’t deliver products as swiftly as Amazon does.

Shopify may continue to attract small to mid-sized businesses looking to offer a personalized e-commerce experience to its customers. But Shopify will fail to scale up to the levels that Amazon has. I think it is just following a very capital intensive strategy to meet an unrealistic objective. I have concerns about its ability to compete with Amazon, as I believe most analysts do as well.

Its stock is trading at $300.96 with a market capitalization of $35.58 billion. It touched a 52-week high of $338.94 earlier this month. The stock was trading at a 52-week low of $117.64 in December last year, when most tech stocks had slumped.

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