Shopify Financial Analysis

Financial Analysis

Current Financials

Profitability

Shopify has maintained stable gross margins from 2014 to 2015, and the 2016’s quarterly reports have shown gross margins is under a sustainable level. Shopify introduced Shopify Payment as one of Merchant Solutions channels in 2014, and the merchant solution began to have a higher portion of the total revenue.  However, Shopify obtains low margin in payment solution because it has weak bargaining power with the Merchant solution partners, especially when comparing to Visa. As a result, increasing in payment solution slightly deteriorated the total gross margin in a diminishing pace. But because of the ceiling of the increase in numbers of payment solution consumptions, total gross margin recently became more stable than 2013 and 2014. The gross margin of subscription solution has been in a more stable level, which is at 79%, given Shopify’s sophisticated and organized operation under this revenue stream. Thus, overall, Shopify has maintained a sustainable gross margin.

Liquidity

As the most representative liquidity ratio, current ratio shows whether the company is able to cover its short term liability with current assets. With sufficient cash and cash equivalents and marketable securities generated from IPO and share issuances, Shopify’s current ratio has been increasing since 2014. The current ratio is 3.46 in 2014 and 5.44 in 2015, which is much higher than the industry benchmark 1.0. In other words, it indicates that Shopify has a good financial health. Therefore, Shopify has high flexibility in its liquidity and is able to catch the opportunity of investing in new project and expand its business.

Forecasting and estimates

Sales Growth

Under a economy recovery, people’s disposable income has been increasing and is expected to grow in the future. The higher the disposable income, the stronger the customer purchasing power will be. Combined with expansion and further technology development of online shopping and mobile shopping services, people will spend more on online shopping. Therefore, a future growth in E-commerce industry is expected which will drive the increase in Shopify’s Subscription Solution sales.  As the leader in the Small and Medium-sized Business (SMB) industry, Shopify has been staying competitive compared to its major competitors. However the company current only occupies 1% of the total SMB market share while the total potential market that Shopify can expand to is 21.7%. The company has huge opportunities in increase its Subscription Solution sales through the expansion of market share. The Merchant Solution revenue will be driven into a higher level with the increase in Subscription Solution sales.

Since 2012, Shopify’s total revenue has increased year over year and it’s expected to keep increasing. The management team is currently focusing on expanding strategy and they have started to develop different channels under Merchants solutions. For example, the company has provide the Shopify Capital channel to help the merchants with their financing. To attract more users and improve user experience, Shopify has invested to different channels under Merchants solutions. With a better service and user experience, the company is able to increase the prices for the premium service. Therefore the the total revenue will increase because of the price increase as well.