How to value an ipo
Shopify IPO to Value Company at $1 Billion
Canadian-based ecommerce platform provider Shopify filed for an IPO in the United States and Canada last month hoping to raise $100 million. The valuation is expected to come in at $1 billion. The company will be listed on both the New York Stock Exchange and the Toronto Stock Exchange.
Established in 2004, Shopify introduced its cloud-based ecommerce platform for small and medium-sized businesses in 2006. Offerings now include ecommerce website creation, payment processing, marketing tools, and inventory management tools.
In its F1 filing with the SEC, Shopify reports that as of March 31, 2015, it had 162,261 merchants from approximately 150 countries using its platform, growing 68 percent over March 31, 2014. In 2014, the platform processed Gross Merchandise Volume, (GMV) of $3.8 billion, representing an increase of 133 percent over 2013.
According to it SEC filing, Shopify has roughly 162,000 merchant customers in 150 countries.
The company has been experiencing rapid growth over the past three years. Revenue increased from $23.7 million in 2012, to $50.3 million in 2013, to $105 million in 2014. Year-over-year growth rates were 112 percent and 109 percent respectively. Yet Shopify has never achieved a profit and losses have increased every year — from $1.2 million in 2012, to $4.8 million in 2013, to $22.3 million in 2014. As of March 31, 2015, Shopify had an accumulated deficit of $33.6 million.
The company needs an injection of funds to provide new products and services as well as bolstering marketing efforts. Sales and marketing expenses increased $3.8 million, or 39 percent for the three months ended March 31, 2015 compared to the same period in 2014, mostly because of an increase of $2.5 million in marketing program expenses such as Google AdWords and advertisements on social media.
Shopify receives most of its revenue from sales of subscriptions to its platform. It also gets payments for domain name registration and sales of store themes and web applications. The company also garners revenue from merchant solutions — payment processing fees from Shopify Payments, transaction fees, partner referral fees, and sales of POS hardware. Merchant solutions supplement the platform by adding value in the form of related services required by merchants.
In the first quarter of 2015, subscription services comprised 60
percent of Shopify’s total revenue, versus 69.4 percent in the first quarter of 2014.
Shopify Payments, introduced in 2013, is the driver for both the increase in revenue from merchant solutions as well as costs. According to the filing, “Gross profit margins on merchant solutions are typically lower due to the associated third-party costs of providing these solutions. As a result, the introduction of Shopify Payments and the resultant shift in the mix of revenue sources has affected our overall gross margin. More specifically, while our total revenues have increased in recent periods as a result of offering Shopify Payments, our overall gross margin percentage has decreased in these periods.”
While merchant solutions revenue increased from $11.9 million in 2013 to $38.4 million in 2014, cost of revenue in the same period increased from $5 million in the $26.4 million. For the first quarter of 2015, merchant solution revenue was $15 million while costs were $10.7. This adds some urgency to the need to raise more funds.
Keeping Up with a Changing Market
A challenge for all platform providers is to keep up with increasingly complex selling scenarios. For example, Shopify has put a good deal of effort into providing an omnichannel platform that lets merchants sell products via websites, social media storefronts, brick-and-mortar stores, and pop-up shops. It also enables commerce from tablets and smartphones. Currently, half of Shopify’s merchants’ storefront traffic comes from mobile devices and one quarter of Shopify’s customers have a Facebook store.
Shopify is going head-to-head with rival Bigcommerce, which is purchasing Zing, a startup that makes checkout software and inventory management tools for brick-and-mortar businesses. Bigcommerce has 85,000 customers, roughly half the number Shopify has. Over the past year, Bigcommerce has formed partnerships with companies like Square and Lightspeed POS to allow them to offer Bigcommerce’s software to physical retail stores. Bigcommerce is also expected to go public, perhaps later this year. The other major Shopify competitor is Magento, eBay’s ecommerce platform.
The successful IPO of Etsy — see my article “Can Etsy Keep Artistic Roots with IPO?” — bodes well for Shopify and other ecommerce companies seeking to go public. Etsy closed its opening day of trading at $30 per share, 86 percent above its initial price of $16 per share. The company raised over $287 million and the company was valued at nearly $1.8 billion. Etsy is now worth more than $3.5 billion.