Shopify Inc. Keeps Growing

By Markets

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Image source: Shopify.

Shopify's (NYSE: SHOP) revenue rose a staggering 93% in the second quarter, to $86.6 million, making it the company's fourth consecutive quarter of revenue growth greater than 90%.Despite Shopify's incredible sales growth, its net loss in Q2 widened to $8.7 million, from $3.5 million in Q2 2015, as the company continued to invest heavily in revenue growth. Investors don't seem too concerned by widening losses as the stock has risen almost 30% since reporting earnings on Aug. 2, but the bigger question is whether Shopify will be able to keep up the pace of its growth or if it is going to start slowing down sooner rather than later.

Shopify's management has sacrificed profits in the short term to aggressively pursue several growth initiatives, and, if all goes according to plan, the e-commerce company should be able to continue delivering close to triple-digit revenue growth in the next several quarters, and post a profit as its business scales.

Shopify scores a major partner win

Strategic partnerships have played an important role in Shopify's growth. Last year, Amazon (NASDAQ: AMZN) decided to ditch its own selling platform, Webstore, and partnered with Shopify to provide merchant services to its third-party vendors. This major partnership contributed to a 70% increase in merchants using Shopify from last year's second quarter to this year's, when total merchants on the platform surpassed 300,000.

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Shopify also benefited when eBay (NASDAQ: EBAY) made a decision to shutter ProStores at the end of 2014, leaving small businesses looking for an e-commerce platform.The ease of integrating Shopify stores with Amazon, eBay, and other e-commerce sites makes Shopify an attractive solution for merchants looking to quickly build a multicommerce business and reach a wider audience.

Amazon will also be Shopify's first integrated marketplace channel, and has been released to a limited number of merchants with plans to launch across the entire Shopify platform before the end of the year. This will make it easier to integrate Amazon features like Amazon Payments and inventory management with Fulfillment by Amazon into a merchant's Shopify stores. It will also allow merchants to list products on directly through the Shopify platform.

The main benefit of Shopify's partnerships is getting new merchants to use its platform, resulting in increases in the company's subscription solutions revenue. Shopify's monthly pricing ranges from $29 to $299, not including credit card processing fees the company earns through Shopify Payments.Subscription solutions revenue increased 73%, and accounted for almost half of the company's $86.6 million in revenue in the second quarter. Monthly recurring revenue kept pace with merchant growth and increased 70% over last year to $14.4 million.

Growing revenue with new services

Shopify continues to develop new services and features to add value that will increase revenues. Several years ago the company introduced Shopify Payments; this was the main driver of merchant solutions revenue's 121% increase to $43 million in the second quarter.Gross Merchandise Volume, or GMV, is the total dollar amount of merchandise sold on Shopify's platform. In the second quarter, GMV more than doubled from last year to $3.4 billion.The GMV processed using Shopify Payments surpassed the billion-dollar mark in the second quarter, and the percentage of Shopify Payments transactions continues to grow.

Last quarter, Shopify acquired Kit CRM, a virtual marketing assistant that leverages messaging to help businesses market their online stores, for an undisclosed price. The virtual marketing assistant helps merchants manage marketing tasks, including running targeted ad campaigns on Facebookand sending thank you emails to customers. Kit CRM costs $10 to $25 per month, and is just one example of an add-on Shopify markets to merchants to help boost its monthly recurring revenue.

If Shopify continues developing additional features and tools, the company should be able to convert more merchants into higher tiers of its e-commerce platform and convince them to purchase additional tools like Kit CRM.

Will Shopify be able to sustain its stellar growth?

Even if merchant growth starts to slow, Shopify should be able to maintain rapid revenue growth by converting merchants to higher-priced monthly plans and adding services. Shopify won't be able to keep increasing revenue by 90% or more quarter after quarter forever, but it doesn't look like it's slowing down anytime soon and investors will be watching to see when the net losses stop.

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Ben Estep has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMZN, EBAY, FB, and SHOP. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.