Shopify: The antidote to Amazon's merchant commoditization

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There aren't many credible threats to Amazon's reign as the king of e-commerce. Shopify, however, is a very legitimate one. Last year, it crushed earnings expectations and doubled its revenues again.

Shopify vs. Amazon

At first glance, Shopify isn’t an Amazon competitor at all: after all, there is nothing to buy on Shopify.com. And yet, there were hundreds of millions of people that bought products from Shopify without even knowing the company existed- eMarketer estimates that Shopify stores processed a little under 9% of all retail e-commerce in the US last year, second only to Amazon, which had 39% market share.

I like Shopify and think its strategy is better than Walmart's. Unlike Walmart, currently weighing whether to spend more after the billions it has already spent trying to attack Amazon head-on, with a binary outcome of success or failure, Shopify is massively diversified. How so?

Shopify is a platform: instead of interfacing with customers directly, over a million third-party merchants sit on top of Shopify and are responsible for acquiring all of those customers on their own. In layman's terms, Shopify is doing a lot of the "boring" and "complicated" parts of selling online for its customers — for a fee of course. That can include storefronts, taking payments, marketing, analytics, shipping, inventory, packaging and more. Except for one big massive difference, Shopify sounds a lot like Amazon's marketplace for 3rd party sellers which makes more than 55% of sales on Amazon.com. With Amazon's marketplace, Amazon controls the end to end experience and the relationship with the customers. The customer orders from Amazon, receives packages in an Amazon box and all returns/issues are handled through Amazon. This is means to stand out not in a search result on Amazon.com, merchants have one choice - compete on price and simply offer the lowest one. Like Marketplace, Shopify offers the same tools and logistics to enable merchants to sell online but it also allows merchants to control the end to end experience and the relation with customers. Shopify protects merchants from being commoditized on Amazon and enables them to earn customers’ attention through a differentiated product, social media advertising, etc.

It's on merchants to stand out and acquire customers. They can't rely on hundreds of millions hitting Shopify.com daily. This is risky but also can be very rewarding for merchants. Many, to be sure, will fail at this: Shopify does not break out merchant churn specifically, but it is almost certainly extremely high. That, though, is the point. The antidote to commoditization is differentiation and that's what Shopify offers to merchants.

Takeaway   

Despite crushing earnings, Shopify's stock has been trending down. In 2020, it set records as the whole world shifted to eCommerce. These numbers will be hard to reach in 2021. Many investors will likely have a hard time accepting negative YoY growth rate and hence the stock is likely to take a hit in 2021. I do think at it's current pricing, Shopify is very expensive and hence I will be looking for the stock to dip further to add more to my portfolio. I really think it's strong long term investment and it will continue to gain market share.

By the way, Amazon is taking Shopify very seriously. Last month it quietly acquired Selz, an Australian tech company that "helps customers sell digital products, physical products and services all from one simple platform"... which sounds a lot like Shopify.


Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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