Shopify IPO: Beware Of Etsy Like Post IPO Valuations

  • Canadian commerce services provider Shopify filed for IPO, seeking to raise $100M in $1B valuation.
  • Company presents impressive triple digit growth rates and a very appealing revenue multiple.
  • In light of the sharp surge in Etsy’s IPO share price, investors should be very careful not to buy when valuation is not compelling.
Shopify pre IPO analysis

Commerce services provider Shopify (SHOP) filed for an IPO, planning to go public on the NYSE and the TSX. The Canadian company offers a cloud-based comprehensive services platform for small and medium-sized merchants to manage all aspects of their business, including inventory, customer relations, sales, and even payment processing.

Shopify provides merchants with SaaS (Software as a service) solutions to support their online or brick-and-mortar stores. By using Shopify, merchants can create an online store, manage inventory, customer satisfaction, marketing, and payment, as well as manage their brick-and-mortar store on the same platform. Shopify allows store owners to consolidate their online and in-store transactions and information under one roof and manage their entire business.

Shopify IPO: Revenue Analysis

Shopify operates under two revenue streams: subscription solutions and merchant solutions. Under the subscription solutions, Shopify records revenues generated from the monthly subscription fee to the Shopify platform, domain registration, and integrated Web apps to be used in the online store. This segment accounted for 60% of Shopify’s revenues in Q1’15 and is growing at a rapid quarterly pace of 15%.

The monthly subscription fees range between $14 for the starter plan and $179 for the unlimited plan. Plans vary according to storage capacity, online/in-store focus, payment processing terms, and other advanced features.

Fees charged for payment processing activities or transaction fees are included in the merchant solutions segment that accounts for the other 40% of the company’s revenues. Shopify merchants can choose whether they want to use Shopify's payment service or another payment processor such as PayPal to process payments. Merchants who use Shopify Payments are charged with a processing fee that ranges between 2.9%+30c to 2.25%+30c of the transaction, depending on the plan they subscribed to. Merchants who choose another payment processing service are charged a transaction fee up to 2% of every deal instead of the payment processing fee. As shown in Chart 1 below, the merchant solution segment is growing at an incredible pace of 32% each quarter.

SHOP_Chart 4_050415 - Copy

Shopify IPO: Shopify Growth

Shopify presents fantastic growth rates both in gross merchandise value (GMV) and in top-line revenues. As mentioned above, subscription solution annual revenues grows at 70% year-over-year and merchant solutions revenue grows even faster at 222% year-over-year. In Q1’15, Shopify reported total revenues of $37M, which reflects a 19% quarterly growth rate, and in 2014, Shopify recorded $105M of annual revenues, which present a 109% year-on-year growth. The best indicator of Shopify’s success is the incredible year-over-year growth in the total amount of goods sold through the Shopify network. As shown in Chart 2 below, in 2014, almost $4B worth of goods were sold using Shopify’s services, which  is a 423% increase from 2012. In 2015, I expect Shopify to generate more than $8B in GMV, which will reflect 130% growth from 2014. As mentioned above, each merchant is charged either with a transaction fee or payment processing fee, and GMV increase has a direct and immediate impact on the company’s revenues.

SHOPIFY revenue and GMV growth 050515

Shopify IPO: Valuation and IPO Price Estimation

Shopify raised almost $90M in three funding rounds from December 2010 to December 2013. In the last round, the company was valuated at $1B, presenting a revenue multiple of 19.9 at that time. According to the Wall Street Journal, Shopify is expected to go public at a valuation of $1B, which will lower the P/S ratio mentioned above to around 8, which is in the middle as compared to two of its competitors: Wix (NASDAQ:WIX), which has a P/S ratio of 5.5, and Etsy (NASDAQ:ETSY), which has a P/S ratio of 14. As shown in Chart 3 below, investors in Series C paid $10.13 for a convertible, preferred Shopify share, and if Shopify stretches its P/S ratio to 14, the IPO share price could reach $17.5. Assuming Series C investors expect a minimal return of 20%, the IPO price will range between $12.5 and $17.5. Most of Shopify’s competitors in the commerce software services market such as Bigcommerce, Volusion and Magento are privately held, so Shopify cannot be compared to them at this point in time.

SHOP_Chart 6_050415 - Copy

Learning from the Etsy IPO, investors should be careful not to be tempted by the stock when its valuation is too high. If the IPO valuation exceeds a P/S ratio of 20, which is the series C ratio, investors should avoid the stock in the IPO and wait for a correction, which is exactly what happened in Etsy’s case.


Commerce service provider Shopify has filed for an IPO, seeking to raise $100M at a $1B valuation. For the Canadian startup, this valuation represents a revenue multiple of eight and allows the company to stretch the IPO multiple up to 14. The ultra-rapid growth of the company’s GMV and top line makes it a very appealing IPO choice. However, looking back at the Etsy IPO whose opening price was 100% higher than the initial IPO price should drive investors to be careful about placing buy orders at a less than compelling valuation.

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