February 19, 2021

Author: Tim Phillips

Shopify stock

It was perhaps no surprise to see shares of the e-commerce Software-as-a-Service (SaaS) provider Shopify Inc (NYSE: SHOP) sell off this week after the company reported its fourth-quarter 2020 results.

Shopify, which provides merchants of all sizes with the infrastructure for an online store, has had an incredible run over the past year or so.

Its stock price has soared nearly 250% since the start of 2020 as the global pandemic forced businesses everywhere to scramble for an online presence to keep sales ticking over.

Yet the market wasn’t impressed with Shopify’s guidance – which stated that growth this year was not going to be as strong as it was in 2020.

Big surprise. That should have been expected anyway with a vaccine having been developed and as economies globally start to reopen.

Yes, people will go back to shopping in person but that doesn’t mean that Shopify’s compelling story is coming to an end. Far from it.

Growing a sticky subscription service

Even though Shopify’s fourth-quarter revenue growth was no doubt eye-popping (clocking in a 94% year-on-year increase), it was its Subscription Solutions growth that caught my eye.

Providing the back-end and front-end processes for an online store, Shopify Plus (a higher-tier service) is actually being increasingly used by large merchants as well, including businesses as diverse as Unilever plc (NYSE: UL) (LSE: ULVR), Shiseido Company Limited (TYO: 4911) and Sennheiser.

The Subscription Solutions part of the business saw 53% year-on-year growth in revenue to US$279.4 million (see below). Its Merchant Solutions division – which includes payments and point-of-sales (POS) help – provided the rest.

What’s exciting for long-term investors, though, is that although it basic “core” subscription offering makes up a higher percentage of overall subscription revenue in the latest quarter, it was down to the fact that more merchants were joined its platform in the latest quarter.

With the potential for those merchants in future to upgrade to the higher-margin Shopify Plus segment.  By leveraging its extensive ecosystem of services, and growing its offerings internationally, Shopify’s prospects look as exciting as ever.

Shopify subscription revenue

Source: Shopify Q4 2020 earnings presentation

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Shopify Inc.

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