Shopify IPO: Expect a Long Uphill Climb to Strong Revenue Growth

On April 14, 2015, Shopify Inc., an e-commerce software provider, revealed its intentions to go public with an initial public offering. The Shopify IPO release is expected to raise $100 million and list the company’s stock on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).

As most tech IPOs this year, Shopify is currently unprofitable. But is it worth a second look?

Shopify IPO Making Waves in E-Commerce

The Ottawa, Canada-based software as a service (SaaS) provider plans to list in New York under the ticker “SHOP” and in Toronto under “SH.” With more than 162,261 merchants using its platform, Shopify enables small to medium-sized businesses to design and manage storefronts. (Source: Securities and Exchange Commission, April 14, 2015.) The sales channel, which Shopify manages for its clients, can be online, on a mobile device, or at a brick-and-mortar location.

E-commerce software solves a major problem often faced by retailers: Shopify reduces costs. No longer are there prohibitive start-up expenses involved in the retail business, as virtually anyone can sell via Shopify; just an idea or product and an e-commerce platform will have you ready for business. But while there are clear benefits to users, Shopify has yet to transition into profitability.


The Shopify business hinges on generating subscription revenue. For example, Shopify’s basic service costs $29.00 per month and enables the customer to set up a virtual storefront. Users can work through their existing web domain or create a new one. There is no need to worry about web hosting services, as Shopify provides the required data storage and processing.

The platform also permits merchants to list an unlimited amount of products and it enables merchants to interact with customers through chat and e-mail support services. Subscription revenue grew at an impressive 87%, on average, from 2012 to 2014, totaling $67.0 million by year-end 2014.

Shopify also generates revenue from the sales of storefront themes, apps that increase functionality, the registration of domain names, and processing payment fees. These revenue streams, together dubbed “merchant solutions,” added another $37.0 million to Shopify’s 2014 sales, or 36% of the total.

This Canadian start-up provides an excellent service. It has also posted solid revenue growth. But like several other IPOs in April 2015 (notable mentions going to GoDaddy Inc. [NYSE/GDDY] and Etsy, Inc. [NYSE/ETSY]), it has no profits to show for it.

Shopify IPO 2015: The Verdict

So is this Shopify IPO release worth a closer look?

The proceeds of the IPO will let the Ottawa native get a foothold in a rapidly evolving industry, which requires not only the latest software, but also heavy marketing. Shopify spent a whopping 41% of its 2014 revenues on marketing efforts.

The expected $100 million in IPO proceeds are also likely to be directed towards Shopify’s balance sheet. Even though Shopify has $59.0 million in cash and cash equivalents, the company continues to report operating losses. This isn’t good news for investors.

In fact, over the life of its business, Shopify has accumulated $33.0 million in losses, or nearly 50% of its shareholders’ equity. The large accumulated balance of loss doesn’t look like it will reverse either.

The problem is that Shopify has already experienced exponential growth as the number of merchants using the platform grew from 41,000 in 2012 to 162,000 as of March 31, 2015. Growth rates of this kind will be hard to replicate and in the preliminary Shopify IPO filing, company management states, “We expect to continue to incur losses in the near term.” (Source: Ibid.)

Adding to the concern is the fact that management hopes that future revenue growth will eventually bring the company into profitability. So, if you’re bullish on Shopify, this must be your primary reason: the expectation of much higher revenue growth in the future—and revenue growth that outpaces costs. That’s an uphill climb, but you can’t blame Shopify for testing the waters in this accommodative IPO environment.