The Official Shopify Earnings Analysis

TLDR:

The Next eCom Paradigm

How Shop is Over and under rated at the same time.

LBAB Community - eCom will never be the same

eCom has hit a new paradigm.

The past 5-7 years have been defined by the DTC-or-Die era: Facebook Hardos, Growth hacks and “Scale Baby Scale (profits come later).” It’s always struck me as weird.

During my time at LuMee back in ‘15 – ‘18, we scaled DTC-first, expanded into Amazon, then Retail. eCom was our biggest channel, with ~50% of this biz on DTC + Amazon. DTC being the majority of that. 

To really age myself, this was back in the days DTC was called DNVBs (Digitally Native Vertical Brands). Luckily we came up with a better name. 

But it didn’t feel like many other players followed the playbook. You either:

1. Weren’t really investing in DTC or… 

2. A DTC-or-Die Hardo. 

Before DTC 1.0, you were either Retail heavy or Amazon Heavy. The OG Shopify Plus crew (MVMT, Pura Vida, Blenders, Kylie Cosmetics, Gymshark) were the ones figuring out how far DTC could go. 

But the game has always been to build a biz + sell your products to as many people in as many channels as possible. With the death of DTC-or-Die and Retailers going digital, it feels like the best time to build an omni-channel biz. 

We can finally realize the dream of selling in every channel, scaling from 1 channel to the next properly, and building massive bizs. There’s finally enough success + data + doom stories to figure out the right playbook.

The most successful DTC path seems to be DTC -> Amazon -> Retail, at these Rev milestones (major exception CPG/Food & Bev):

1. $0 – ~$5m: Launch DTC. Master customer-product-messaging mix. Scale.

2. ~$5 – $20m: Take traction to Amazon. Scale “digital” spend aggressively.

3. $20m – $80m: Digital acquisition’s too expensive. Time to start catching foot traffic: Retail.

The truly great bizs push the upper bounds of each segment far beyond what’s listed here. But there’s a graveyard of DTC brands who pushed DTC too far because they didn’t want to be an “Amazon brand” or dilute their margins in Retail.

But when you take a step back and look at the macro, the average eCom/Retail biz has 10-15% net operating income. It’s one of those natural laws of the universe.

There are always exceptions, but from all the brands I’ve analyzed it tracks. It’s impossible to hit that number if you’re spending 30%+ of Rev on Marketing because digital CACs are through the roof.

There’s a really, really big opportunity out there. Private Equity and private investors are chomping at the bit now that this industry is so mature and proved it isn’t going anywhere.

In wave 1.0: MVMT and Pura Vida were the biggest pure play Shopify exits. Kylie Cosmetics and SKYNN started to break into the future with $1B exits. The playbook for all these brands was retail expansion.

Now, Figs, Allbirds and Olaplex have all IPO’d. SKIMS’ IPO is on the horizon and there are over 500 bizs doing $100m+/yr on Shopify. There are 2m bizs on Shopify.

This is the new paradigm. These bizs can get so much bigger, and there’s so much more growth to be had for the right biz in the right market. It won’t happen in 5 years, but it is happening.

For the main story today, we’re going to deep dive into Shopify’s earnings to figure out where we’re headed.

Let’s Examine This Biz

Note: NOTHING that follows is investing or financial advice, just my own analysis. Disclosure: I’ve been a Shopify investor (public markets) since 2016.

Shopify is the Ecom-onomy. Processing $235.9B in GMV (= Qatar’s GDP). Basically what I’m saying is Shopify is absolutely rolling and could host the next World Cup.

Trading at $81.29/share with a $103B market cap, +342% in the Last 5 years. With a 15x Rev multiple and a 790 P/E ratio!, Shopify is somehow over & undervalued at the same time.

Investors hit the stock hard on lower guidance (They expect lower sales next year), but let’s be honest. Shopify is cranking.

• Topline is up.

• Bottomline is up.

• Moving swiftly on Retail & AI.

• Grabbing public logos.

• Lowering Costs while producing as much/more

Shopify’s momentum is building more momentum. Who knows that that means for the stock price, but it’s clear what is means for us. Updates. Updates. Updates.

Financial Summary

TLDR Analysis: Shopify got FITTTT (#P&LGoals)

• Rev +26% YoY while COGS +25% & G&A -31% 😍

• Massive NI (+104%) + FCF (+587%) Margins turnaround 😍

• Processed $235.9B in GMV (+23% YoY) 🤯

• Payment Volume $137B (58% of total GMV)

Their stats are even more impressive when you consider the $1.34B Impairment on Logistics biz.

Love, Love, Love to see they burned 72% less $ than last year. Leaving more money in the bank. Just in case.

Let’s Learn This Biz!

Their earnings this year didn’t wow the crowd, their biz should.

I’ve been an OG Shopify fanboi, so I’m already invested. For today’s newsletter, let’s focus more on Shop’s direction and what it means for your biz. 

1) The Shopi-conomy is real.

Shopify + Amazon are the windows into the Ecom-onomy. The sheer tonnage of dollars passing through these platforms = countries' GDPs. So what does the economic data tell us?

Because if Shopify’s growing (GMV processed/# of Stores/their Rev) faster than the Consumer market, that means 1/2 things:

1. eCom is growing faster and eating more consumer market share. Or…

2. Shopify is capturing more of the existing eCom market share.

When you look at the macro data. eCom isn’t growing at an insane rate. So we can rule out #1.

When you hear Harley call out brands on their earnings call like: On Running, Oscar De La Renta, Quicksilver. #2 is much more likely. These brands are so much larger than the average Shopify account that they seem like outliers in Shopify’s GMV reporting. 

But they aren’t really outliers because this is the major area of growth for Shopify’s biz. Shopify Plus now accounts for 31% of Shop’s Subscription Rev.

So what can we gather from the tea leaves?

1. Shop is growing well because they are dominating the Mid-Market.

2. Overall Consumer Growth is there, but Shop’s numbers aren’t representative of your numbers anymore.

3. Category growth is still the best predictor of how your biz will do.

Takeaway: Shopify’s growth no longer = Your Growth

2) Moving on up to Enterprise

Shopify says they're “arming the rebels,” but the featured Product Updates say “Ent. Ent. Ent. Read all about it!”

In Q4, Shopify Plus accounted for $46m / $149m of Subscription Rev (31%). The major product announcements for the year (Commerce Components, Retail, Universal Shop Pay) are all primarily focused on Ent bizs.

When you look at the Product callouts from their earnings, there were some downmarket features that were primarily AI-Driven. Everything else was Ent.

• POS Terminal: New enterprise-grade payments hardware. Plus:

  • Retail Plan: A new pricing plan for brick-and-mortar bizs

  • Ship from Store:  Exactly what it sounds like.

  • Offering Shop Pay in POS for in-store payments 

• Shopify Markets Pro: End-to-end, cross-border commerce solution

• Shopify Bill Pay: Pay vendors directly in the Shopify admin

• Expanded Product variants (up to 2k) to support more complex classifications.

• (Obviously) Commerce Components: The modern, composable stack for enterprise retail. I’m not saying these features won’t be helpful for the up-and-coming brands out there, but the serious R&D investment here, in a year where OPEX got cut everywhere else, indicates a clear strategy.

What’s incredible about this is just like every other Shopify product feature. The same Ent-level products will be available in some form to all brands on the platform. Publicly traded brands to mom and pop shops.

We’ll have to see where all this gets priced out, but the value of that feature set quality alone will make the monthly bill worth it.

Takeaway: The Ent March is in full motion. Get your bibs ready.

3) 2023. The Year Shopify got Fit.

Coming off of ‘21 with insane growth and Profits (Shop’s ‘21 NI was 61%!!!), 2022 was the year Shop got bloated. 2023 was the year for Shop to get back in shape.

And they did.

All of those layoffs were painful, and I feel bad for everyone that Shopify laid off, but it was the right move for the biz. The P&L clearly shows how they corrected their distorted Post-COVID strategy:

• Rev +26% YoY

• Gross Profits +28% YoY

• S&M -1% 

• G&A -31% YoY

• R&D +15%

What does this mean in English:

• Increased Rev while keeping Sales & Marketing in check

• Had tight control over COGS as Sales grew 

• Trimmed the fat in G&A with no noticeable impact

• Used that freed up budget on R&D. (AKA investing in the future)

As a result, they:

• Turned a ‘22 Net Loss of -$3.4B -> $132m Net Income.

• Turned  -$186m in ‘22 FCF -> $905m Positive ‘23 FCF

• Burned $618m fewer dollars YoY.

This is why investors give SaaS juicy valuations. Shopify’s YoY comparisons show how SaaS can flip the switch from Growth -> Profitability. Shopify spent the year showing us all they know how to hit the gym when they want.

Takeaway: Shop’s fitness plan gets rewarded in 3 years. Not 3 months.

Final Thought

2023 was a complicated, painful but ultimately positive year for Shop. They’re going to get dragged for an insane market cap based on today’s earnings and slower growth projections, but this to me is the sign of a monster biz willing to do what it takes to win.

2 Contradictory ideas can be true at once. Shopify can be overvalued today + undervalued long term.

• Shop’s 785x P/E ratio is insane

• But its 15x Rev multiple sounds reasonable

You wouldn’t invest in Shopify at 15x Rev? I can tell you that’s a MUCH better deal than most of the new SaaS raising on the market with way less traction. 

Shop showed that they can make the painful decisions that are right for the biz long-term and that they can deliver on Growth + Profits + Cash.

Now, all they need is continued investment and patience. If they continue to grow at 15-25%/yr over a decade this will be a massive biz.

The only question I have. How do you lose 76% of your Goodwill value YoY? In ‘22, Shopify had $1.8B in Goodwill value. In ‘23, they had $427m.

🧠 The Takeaways

Shopify’s incredible growth is GMV-apalooza. At Shop’s current scale they represent an economy not a SaaS platform.

1. Shopify’s scale is misleading for your biz. They’re growth is through whales, not necessarily growth in overall eCom.

2. Shop’s sights are on Ent brands. That means more Ent features for the rest of us.

3. Shop got fit in 2023 and should be an inspiration to us all on where to find line items in the P&L.