Shopify Scores a Black Friday and Cyber Monday Win

Markets Motley Fool

E-commerce solutions provider Shopify (NYSE: SHOP) recently announced that it processed over $1 billion in gross merchandise volume (GMV) on its platform from more than 500,000 merchants in 175 countries during the extended Black Friday and Cyber Monday weekend.

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During its peak, Shopify merchants were processing more than $1 million in transactions per minute, and mobile sales accounted for 64% of all orders -- a 10% jump from 2016.

Shopify didn't release exact Black Friday GMV figures last year, but it revealed that it was processing $555,716 in transactions per minute during that weekend's peak. This indicates that Shopify probably nearly doubled its GMV year-over-year.

Shopify CEO Tobi Luke stated that the "$1 billion milestone emphatically stakes a flag in the ground for entrepreneurs and small business owners all around the world," and that the company was "fiercely proud of helping them be successful during a period historically dominated by big box retailers."

But what does this "milestone" actually mean for Shopify investors? Let's take a closer look at Shopify's business to find out.

Understanding Shopify

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Shopify's platform helps smaller businesses design, set up, and run their online stores. It also helps them process orders, payments, and shipments, and launch marketing campaigns, build customer relationships, and use analytics to measure overall performance. In short, it's a one-stop-shop for businesses to quickly establish an online presence.

Shopify's first mover's advantage in this space helped it fend off many challengers, including Amazon's (NASDAQ: AMZN) WebStore. WebStore flopped, and Amazon subsequently agreed to integrate Shopify's platform directly into its marketplace.

Shopify's revenue rose 95% in 2015 and 90% in 2016, and analysts expect 70% growth this year. Shopify isn't consistently profitable, and its operating expenses remain high due to investments in its ever-growing ecosystem.

That ecosystem includes Shopify Pay, which stores customers' payment data; a point-of-sale card reader; a wholesale channel for buyers; and new APIs, which let developers integrate Shopify's platform into their apps. However, analysts think Shopify might squeeze out its first annual profit this year.

What $1 billion in GMV means for Shopify

Investors should remember that GMV -- the value of all goods processed on the platform -- doesn't equal the total revenues booked by Shopify. Here's how much GMV and revenue Shopify generated during the past four quarters:

Metric

Q4 2016

Q1 2017

Q2 2017

Q3 2017

GMV

$5.5 billion

$4.8 billion

$5.8 billion

$6.4 billion

GMV YOY growth

94%

81%

74%

69%

Revenue

$130.4 million

$127.4 million

$151.7 million

$171.5 million

Revenue YOY growth

86%

75%

75%

72%

In this context, $1 billion in GMV isn't a really huge number. But we should remember that Shopify's fourth quarter GMV in 2016 represented 36% of its annual GMV, thanks to the busy holiday shopping season. Therefore, if Shopify nearly doubled its GMV during this Black Friday and Cyber Monday, investors should see a nice boost to its GMV and revenue for the fourth quarter and full year.

What's next for Shopify?

Shopify's stock rallied more than 140% this year on a streak of earnings beats. However, that rally boosted its price-to-sales ratio to 18, which is triple the industry average of 6 for software companies. Assuming that Shopify achieves profitability, it still trades at a whopping 370 times next year's earnings.

Those high valuations have made Shopify a target for short sellers like Citron Research, which claims that the company "oversells" the ability of its customers to make money like a "get-rich-quick" scheme, and that many of its small customers can't grow into sustainable businesses. Other analysts have pointed out that the stock's valuation leaves it vulnerable to a pullback anyway, regardless of the merit of Citron's claims.

The bottom line

Black Friday and Cyber Monday are still huge shopping days in America, and Shopify will likely be a major beneficiary as more businesses expand digitally. Racking up $1 billion in GMV is impressive, and seemingly contradicts Citron's notion that smaller businesses can't thrive in a market filled with retail giants.

Back in May, I stated that Shopify's "best days were still ahead." I still stand by that bullish thesis, but I also think investors shouldn't start a full position at these valuations. Instead, they should patiently buy the dips over the next few quarters to get a better average price.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.