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Shopify well placed to weather economic fallout from COVID-19, say analysts

The Shopify Plus office in Waterloo in September 2018.
The Shopify Plus office in Waterloo in September 2018. Bloomberg via Getty Images/Cole Burston

Despite losing nearly US$25 billion in market cap from its peak last month, e-commerce giant Shopify is well placed to avoid the worst effects of an economic downturn resulting from the COVID-19 pandemic—and it could emerge from the outbreak ready to make deals and win business away from legacy technology providers, company and technology analysts say.

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Talking Point

Ottawa-based Shopify’s mix of big brands and small merchants could insulate it from the worst effects of an economic downturn resulting from the COVID-19 pandemic, according to stock and retail analysts. With a strong balance sheet, the e-commerce firm is also well placed to make acquisitions and win business away from legacy technology companies.

Shopify shares are down more than a third from their mid-February high amid a market-wide swoon, but the company still has a strong balance sheet to make deals and survive revenue slumps. It closed out 2019 with US$2.46 billion in cash and marketable securities on hand, following three secondary share offerings in two years.

The company’s executives have been active on social media during the outbreak, soliciting suggestions for ways to help merchants and compiling a list of government-support programs for small businesses. The Ottawa-based firm’s software and services were historically mostly used by small merchants, but big-brand division Shopify Plus now accounts for an increasingly important share of its business. 

Those two groups are likely to be affected by a downturn at different times, according to Ken Wong, director of Guggenheim Partners and an analyst who covers the company. “The smaller [ones] will probably be okay, near- and medium-term, but hurt more long-term if this is protracted,” he said. “The big [ones] have a larger percent of the wallet, [so] they’ll probably see some pain upfront.”

Shopify Plus contributed 27 per cent of the company’s US$53.9 million in monthly recurring revenue as of the end of 2019, up two percentage points from the previous year. The company also said the number of merchants doing more than US$1 million worth of business on the platform rose 44 per cent last year. 

“More established businesses can probably weather the storm a little bit better than your average entrepreneur or [small- or medium-sized business],” said Ygal Arounian, vice-president of equity research at Wedbush Securities. A Plus merchant could lose a large share of sales, but “if they’re still around when all this wraps up and they have a demand backlog, that can come back really easily, versus a smaller merchant that has to close up shop.” 

Big-brand clients of the company, which did not respond to The Logic’s request for comment for this story, include consumer packaged-goods giants like Nestle, General Mills and Heineken. Shoppers continue to stock up on these firms’ staple products during both recessions and outbreaks, and earlier this month, Nielsen predicted online sales will grow in the U.S., still by far Shopify’s largest market.

Businesses selling less essential items—clothing brands and furniture retailers, for example—could be harder hit by a downturn, as people avoid buying things they don’t feel they need. “We don’t have a really good sense of how much of Shopify’s exposure is to consumer discretionary,” said Wong, noting that the company doesn’t report its merchants by category. But a June 2019 company report identifies shirts and tops, shoes, books and mobile-phone cases among the most sold products on Shopify stores globally. 

Shopify primarily makes money by selling subscriptions for its platform and through fees for add-ons like payment processing, shipping, loans and cash advances. Wong said growth in both is likely to “soften” in a downturn. The second category, which the company calls merchant solutions, contributed almost 60 per cent of its US$1.58 billion in 2019 revenue, and it’s growing faster. That income will “fluctuate with however much the economy is spending,” said Joe Cicman, a senior analyst at Forrester Research. 

Arounian said it’s harder to quantify the effect of a downturn on Shopify than, for example, ride-sharing firms Uber and Lyft, which have seen demand drop off directly as a result of consumers socially isolating to avoid viral transmission.  

In February, CFO Amy Shapero said 2020 would be “a year of heavy investment” for Shopify, including in its fulfillment network—warehouses and software that will handle shipping and delivery for merchants—as well as international growth and improvements to the Plus product. The firm forecast revenues between US$2.13 billion and US$2.16 billion, and said it would spend some US$80 million on capital expenditures, mostly for new office space. 

It has not issued any additional guidance in response to the COVID-19 outbreak, but neither Wong nor Arounian expect Shopify to retreat materially from its 2020 growth plans. “Maybe some of the bigger product releases that we would have expected to see mid-year get pushed back a little bit,” Arounian said, noting that the company has called off the in-person part of its annual Unite conference in May. 

Wong said technology companies with long-term growth plans are often able to accelerate in downturns. “They typically are able to buy [other companies] when a lot of these privates that thought they were multi-billion-dollar companies all of a sudden realize that the window might have closed,” he said, adding that public firms with valuable equity are particularly well placed to make acquisitions. 

In the longer term, it could win business from other vendors whose customers are looking to grow their online business or reduce their technology costs. “If this slowdown goes longer—[say] a year or two—Shopify is actually in a pretty good position to capture replatforming from some of these really big companies that are lumbering under very expensive and old monolithic e-commerce infrastructure,” said Cicman.