Shopify’s one-stop-shop e-commerce offering is very popular, but do its risks outweigh the pros?
Shopify (NYSE: SHOP) is an all-in-one platform that allows small and medium-sized businesses to create and operate an e-commerce store with ease. With the rapid expansion of e-commerce and a lot of excitement among investors about Shopify, there is a lot to like about the company. However, there are still some significant growth risks to consider:
1. New market entrants
With more and more retailers placing a heavier emphasis on e-commerce offerings, many new competitors to Shopify have been entering the market. The likes of WooCommerce and Squarespace are already major competitors for the creation of e-commerce platforms. For fulfillment services, Amazon (NASDAQ: AMZN) currently wears the crown. Square (NYSE: SQ) launched a similar offering in 2019, working with United Parcel Service (NYSE: UPS) as its fulfillment service. MercadoLibre (NASDAQ: MELI) has also gained a strong foothold in Latin America, making an entrance into that market very difficult.
Big companies such as PayPal (NASDAQ: PYPL) and Google (NASDAQ: GOOGL) may also look to compete with Shopify down the line, further diluting the market. While these entrants would not spell the end for Shopify, it certainly would have a negative effect on its share price if these offerings were a success.
2. Growth costs
Since Shopify’s IPO in 2015, its average annual revenue growth has been more than 70%. It now has more than one million customers using its platform. Over time, with revenues increasing, it becomes harder to sustain this rate of growth. The company also is still not profitable, generating a net loss of $125 million in 2019.
To continue its impressive growth rates, Shopify will have to spend to reach new markets and to provide a more efficient offering. It has now started the Shopify Fulfillment Network that will see the company storing inventory at designated warehouses, allowing merchants to reduce their shipping times.
With a lot of merchants using suppliers in the Far East, this has been the main source of delays for customers receiving their products. This new fulfillment network will require an investment of $1 billion over the course of five years.
3. Potentially exposed target market
The main focus of Shopify is small and medium-sized businesses. The e-commerce platform allows these business owners to set up an e-commerce store with little or no technical or coding knowledge needed. Everything is taken care of for these business owners, allowing them to focus on other parts of their business. However, when there is economic uncertainty, it is small and medium-sized businesses that tend to suffer the most.
The global economic outlook now looks hazy due to the coronavirus pandemic and the oil crisis. Many business owners will have to shut their operations as they can’t keep up with mounting costs, decreasing consumer spending or debt obligations. Shopify has been around during a period of economic success, but with the tables now turning and revenues potentially drying up for its customers, Shopify will need to adapt and find other ways to generate revenue to make up for any shortfall.
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