On April 14, 2015, Shopify Inc., an e-commerce software provider founded in 2006, revealed its intentions to go public. The Shopify initial public offering (IPO) is expected to raise $100 million and list the company’s stock under the ticker symbol “SHOP” on the New York Stock Exchange (NYSE).
The Shopify IPO, in the $15.00-per-share range, values the company at $1 billion. Given the stiff competition from established industry players, should investors buy in?
Shopify IPO: The Competition
What differentiates Shopify is that it combines all parts of an online merchant account, including a shopping cart and payment gateway, into one easy-to-use solution. Setting up an online storefront has never been easier. But Shopify isn’t the only e-commerce platform and software provider in town.
Lots of names come to mind: e-commerce software provided by Square Inc., Etsy Inc. (NASDAQ/ETSY), Amazon.com Inc. (NASDAQ/AMZN), eBay Inc. (NASDAQ/EBAY), e-commerce software from Wix.com Ltd. (NASDAQ/WIX), e-commerce services provided by GoDaddy Inc. (NYSE/GDDY), and even the retail platform of Alibaba Group Holding Limited (NYSE/BABA) for internationally focused merchants.
There are countless options available to sell goods online without the use of Shopify services. Merchants can start selling with ease on Amazon and only pay transaction fees. Even simpler, auctioning goods without a customized web store is possible on eBay. Creating a unique storefront and marketing merchandise on Etsy.com is another option for handmade goods sellers.
There are also plenty of alternatives on the e-commerce software side (the stuff needed to create a web site and process transactions). Square, Inc., out of San Francisco, allows sellers to accept offline debit/credit transactions and seamlessly connect with small business applications like “Intuit QuickBooks.”
Another option, for larger merchants especially, is to set up an online storefront through GoDaddy Inc. Smaller merchants can utilize the Wix.com platform to set up an online storefront, and manage customer relations and inventory—similar to Shopify’s offering, albeit less advanced.
What is Shopify Worth?
Shopify faces intense competition. But management is looking to raise $100 million. This will likely value the company at nearly $1.0 billion. The $1.0-billion price tag would make Shopify worth roughly 10 times its total 2014 sales. That’s equivalent to the price-to-sales multiple placed by investors on Etsy. However, it’s much higher than eBay’s multiple of 4x, Wix.com’s multiple of 5.5x, and Amazon’s 2x price-to-sales multiple. Ultimately, Shopify is more expensive than most of its peers.
What Does This Possible IPO Valuation Tell Investors?
It tells investors that revenue is expected to climb higher—much higher. That would be remarkable as, to date, revenue growth has been impressive. Monthly recurring revenues, which track average monthly subscription fees from merchants, grew 72% in 2014 and another 12% in 2015. Moreover, the dollar volume of transactions on Shopify web stores grew 132% in 2014 and the company is on pace to add another 40% in 2015. (Source: Shopify SEC Preliminary IPO Filing, April 14, 2015.)
But, if Shopify’s spending doesn’t continue to tick higher, traditional avenues of increasing revenue are sure to lose steam. To date, that has been Shopify’s Achilles heel; spending in excess of revenues. Shopify’s operating income has been negative since 2012. In fact, the losses have grown from $1.5 million in 2012 to over $21.0 million in 2014. Rising marketing, research, and development costs have been a major contributor to Shopify’s consistently negative earnings.
What Does This Mean for Shopify?
I wouldn’t be surprised if investors ignore Shopify’s profitability issues. After all, it is a tech startup. And profits aren’t a prerequisite for a successful initial public offering. After the IPO frenzy, investors will expect results to come through.
If Shopify’s offering price is in the range of $15.00 per share, the tech startup will cost 10 times its 2014 sales. From here, the bar will have been forever set and Shopify will have to live up to its impressive pre-IPO revenue growth results.
If it fails to do so, shares are likely to gravitate toward the more reasonable valuation benchmarks set by eBay, Wix.com, GoDaddy, and Amazon. Necessarily, price will have to trend lower, as investors will refuse to pay up for Shopify’s sales figures.
For example, if investors decide to only pay five times Shopify’s sales, a price-to-sales multiple similar to Wix.com, the shares will only be worth $7.90. That’s a lot of downside from a possible IPO price of $15.00. Investors interested in buying Shopify stock should be prepared to withstand such volatility—a common problem with high-growth stocks with an unproven track record.