News

Behind Shopifys stunning valuation — US$19 million per employee

“At a certain point, you run out of superlatives to describe what Shopify has accomplished.”

Article content

At a certain point, you run out of superlatives to describe what Shopify has accomplished in the six short years since it began selling shares on stock exchanges in New York and Toronto. Consider the short list:

Advertisement

Article content

  • The number of retailers using Shopify’s online platform has jumped from 244,000 to more than 2 million.
  • Partly as a result, quarterly revenues at Ottawa’s e-commerce enabler have surged from $45 million to $1.1 billion. This, according to Shopify’s second quarter report, released Wednesday (all figures U.S.)
  • The company’s head count now tops 10,000 compared to less than 1,000 in 2015.
  • And, most remarkable of all, Shopify’s market value has exploded to $191 billion — up from a slender $1.3 billion after its initial public offering.

Article content

Shopify’s ambitions, of course, don’t end there. Harley Finkelstein, the firm’s irrepressible president talked Wednesday about Shopify’s end game, which is to building a retail operating system to transform “the future of commerce.”

Advertisement

Article content

Although Shopify warned Wednesday that its pace of growth was slowing as people gradually return to shopping in physical stores, the underlying shift towards e-commerce still appears strong.

In the U.S. — the source of nearly 70 per cent of Shopify’s revenues — e-commerce revenues this year are expected to make up 15 per cent of total retail sales compared to just 11 per cent in the pre-pandemic year of 2019, according to eMarketer. Further, eMarketer predicts online sales will comprise nearly 24 per cent of total retail revenues by 2025.

Unlike e-commerce giants such as Amazon and Walmart, Shopify does not sell directly to consumers. Instead, it develops technology and apps for smaller retailers that do. The combined revenues of Shopify’s customers approached $80 billion in the first six months this year. Even if the U.S. portion of these remains flat for the remainder of the year, Shopify’s network of retailers will account for 12 per cent of estimated e-commerce sales this year in the U.S. — well behind Amazon’s 40 per cent but ahead of Walmart’s 7 per cent share.

Advertisement

Article content

Earlier this week, analysts had forecast Shopify’s total revenues this year would top $4.45 billion — up 52 per cent from 2020 — and would hit $5.9 billion in 2022, up another 32 per cent. These projections aren’t likely to change much in the wake of the second quarter results.

What may change — though there is certainly no guarantee — is investors’ perception of Shopify’s stratospheric market valuation. The company’s market value at close of trading Wednesday was $191 billion — 42 times estimated 2021 revenues. In the wider tech universe, a ratio of 10 times revenues is considered expensive. But even in the rarified atmosphere of e-commerce startups, that’s rich. The market value of two of Shopify’s biggest competitors — BigCommerce and Lightspeed Commerce — is less than 25 times projected revenues.

Advertisement

Article content

It’s a stunning contrast with the three firms that dominate the Kanata skyline — Ericsson (wireless infrastructure), Nokia (IP networking) and Ciena (optical networking). They have a combined market value of $80 billion, yet this represents just 1.4 times this year’s projected revenues.

An even starker comparison is this: Shopify’s valuation equates to about $19 million per employee (C$24 million) while the combined market value of the big three works out to just $400,000 per employee.

Is Shopify really that much more efficient at generating revenue? In some way, yes. Shopify has the great advantage of starting with a clean slate. Any new sale it wins, is money added to the heap. Ericsson, Nokia and Ciena are all seeing rapid growth in sales of infrastructure related to 5G wireless and other new technologies, but this is accompanied by revenue declines related to older product lines. Overall, these firms expect to grow 5 to 10 per cent annually.

Advertisement

Article content

Nevertheless, there’s a great disconnect locally. The big three, which employ 5,000 in the Ottawa area, operate significant global R&D labs, giving the companies a very tangible presence. Most of the workers are expected to return to their offices and labs post-pandemic, albeit on a hybrid schedule.

In sharp contrast, Shopify is nearly invisible locally. Although it employs an estimated 1,200 here, the company sent them to work from home at the beginning of the pandemic and appears to have no intention of bringing them back. “Employees will continue to work remotely in 2021 and beyond,” Shopify noted in its detailed financial filing on Wednesday, adding that it is still assessing what to do with the offices it didn’t write off last year.

Advertisement

Article content

Indeed, the e-commerce enabler really is becoming a most ethereal firm. A check with LinkedIn reveals Shopify’s workers are scattered throughout — with hundreds each in the Philippines, Morocco, India and Ireland. Hiring has been rapid in the U.S., Toronto and Vancouver. Ottawa, the city of its origin, is no longer the single biggest centre of operations. That distinction belongs to Toronto.

As is common with successful and young high-tech firms, the rewards have been distributed unequally. Up to 40 per cent of Shopify’s workforce consists of modestly (but competitively) paid remote employees who help Shopify customers set up websites and sort through the various technologies and apps on offer.

Employees who joined as recently as two years ago have done nicely with stock options, though not as well as the firm’s top five executives. Led by CEO and founder Tobit Lütke, the executives have collectively exercised options for gross proceeds of more than $1 billion since 2015.

Advertisement

Article content

But whatever personal profits were made, a good chunk were available to the general investing public as well. Shares acquired at the IPO for $17 closed Wednesday at $1,540.

Investors yesterday appeared to be undecided about the meaning of Shopify’s second quarter results as they bid the shares down nearly four per cent at one point..

But that is a very short-term view of a company that is peering very far into the future. Ericsson, Nokia and Ciena are examples of what Shopify could one day become — truly giant multinationals with vast operations and products of varying ages.

Even if Shopify continues growing beyond next year at 25 per cent annually, it will take seven or eight years to reach the level of revenues generated by Ericsson or Nokia.

Advertisement

Article content

Whether Shopify actually gets there without significant missteps is anybody’s guess.

Investors contemplating getting in now might have a look at the list of risks included with Shopify’s latest filing.  One short paragraph tells the tale:

We believe that our future success is dependent on many factors, including our ability to expand our merchant base, retain merchants as they grow their businesses on our platform, offer more sales channels that connect merchants with their specific target audience, develop new solutions to extend our platform’s functionality and catalyze merchants’ sales growth, enhance our ecosystem and partner programs, provide a high level of merchant support, hire, retain and motivate qualified personnel, and build with a focus on maximizing longterm value.”

Simple, really.

Advertisement

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload the CAPTCHA.