PaulMcKinnon
Following Shopify’s (NYSE:SHOP) bull run during the pandemic, the stock has seen a harsh rout over the past year, as consumers and merchants are no longer home-bound. Investors have been particularly concerned by the slowdown in its merchant base growth, questioning whether Shopify’s relatively pricey subscription plans can effectively compete in an increasingly competitive landscape. The market is under-appreciating Shopify’s wise merchant acquisition strategy through systems integrators like Deloitte and EY, offering an attractive avenue to advance revenue growth.
Systems Integrators
Shopify has profoundly stepped up its merchant acquisition strategy this year, particularly through the use of Systems Integrators (SIs). “A systems integrator is an individual or business that builds computing systems for clients by combining hardware, software, networking and storage products from multiple vendors”. Shopify has partnered with industry-leading, multinational professional services corporations, namely Deloitte, Ernst & Young (EY) and KPMG, to encourage their respective client-bases to integrate Shopify’s commerce solutions into their core business operations, as well as advance its offerings for the current merchant base. The partnerships and subsequent integration efforts are chiefly targeted towards large enterprises, and therefore induce increased penetration of Shopify’s premium subscription plan, Shopify Plus ($2000/month).
Shopify’s alliance with Ernst & Young entails access to:
The proven compliance, data analytics, global tax, trade and managed services capabilities of EY teams [which] will help Shopify’s large merchants remain compliant when selling regulated products [e.g. pharmaceutical products] — regardless of geography. This will allow merchants to be updated on rapidly evolving regulations, operate and sell products in a compliant manner with reduced risk, and drive a tax-efficient distribution model, creating a leading-class digital experience for customers.
By enabling access to such valuable regulatory and legal compliance services, Shopify is significantly advancing the value proposition of its solutions by easing global compliance complexities for merchants, particularly for those operating in highly-regulated industries, serving as an additional competitive advantage over rivals.
Furthermore, “EY will be training an initial cohort of 500 technical professionals across their EY Wavespace network at 50 locations globally on Shopify”, complemented by access to the Shopify platform for 10,000 consultants. As these consultants assess their clients’ business needs and set out the integration plan/process, they will induce their clients to adopt Shopify’s commerce solutions as part of these enterprises’ endeavors to modernize their retail operations. Essentially, such partnerships open up a lucrative sales channel for Shopify’s high-end product offering.
Deloitte will also encourage its large client base to incorporate Shopify Plus as part of systems integration services. The Deloitte partnership encompasses encouraging clients to adopt Shopify’s social commerce tools. This includes Shopify’s social media sales channels like Facebook, Instagram and YouTube, as well as its exclusive Shopify Audiences tool, which enhances merchants’ ability to reach high-intent shoppers and drive higher sales conversions. As with EY, Deloitte’s efforts to induce its clients to employ Shopify’s commerce tools and become Shopify Plus members creates a promising avenue for boosting sales revenue.
These advantageous partnerships are materializing thanks to Shopify’s resolute focus on building a superior product rather than offering cheaper solutions to quickly penetrate the market (as new, smaller rivals are attempting to do). Leading professional services firms like EY and Deloitte would not want to undermine the value of their own consultancy services by partnering with mediocre e-commerce platforms. Instead, in the interest of offering best-in-class solutions for their esteemed client bases, leading consultancies are choosing to partner with Shopify, which is testament to the e-commerce giant’s ability to successfully build industry-leading products and services. Therefore, Shopify’s determination to offer superior e-commerce solutions will induce a self-reinforcing growth strategy, whereby the more advanced its solutions become, the more systems integrators want to partner with Shopify (bring higher-end merchants to the platform), resulting in increased revenue/ cash generation to spend on R&D efforts aimed at further advancing its solutions, and so on. Shopify’s broadening exposure to new types of merchants and their corresponding business models/ industries through these systems integrators also enhances Shopify’s commercial intelligence, allowing it to make more well-informed investment/ R&D decisions to produce increasingly relevant and valuable merchant solutions, which again augments the appeal of its solutions for both merchants and systems integrators, thereby widening its moat against competitors.
Furthermore, Shopify’s prudent strategy of growing its merchant base by partnering with leading systems integrators not only enables the acquisition of new merchants through endorsements by professional consultants, but also extends Shopify’s ability to deeply imbed its commerce solutions into enterprises’ core operations. Once Shopify’s solutions become deeply integrated into large corporations’ day-to-day business activities, they are considerably less likely to look for alternative e-commerce providers, creating vast and sustainable sales revenues, thereby improving the quality of its revenue streams.
While the systems integrators route offers promising growth potential, it also raises third-party risks, as it becomes integrated with solutions from other providers. Synergies/ integrations with other solutions not working out as effectively as planned by consultants, or operational failures of other integrated solutions may undermine clients’ experiences with the Shopify platform and leave a negative impression, impeding Shopify’s ability to cross-sell more of its solutions through encouraging clients to abandon their legacy providers. That being said, Shopify’s impressive track-record of encouraging large merchants (including household names like Heinz) to migrate to Shopify Plus is testament to Shopify’s high-quality solutions. Shopify’s brand power and highly-regarded solutions not only mitigate the risk of suffering negative impressions through third-party failures, but also serves as a gateway to encourage system integrators and clients to adopt more of Shopify’s solutions, beyond its software services. While Shopify is primarily perceived as a Software as a Service [SaaS] company specializing in digital commerce, its solutions further extend towards Point-of-Sale [POS] hardware solutions to serve brick-and-mortar stores and an expanding fulfillment network. Shopify is constantly innovating to expand its suite of commercial solutions and omni-channel capabilities. Hence Shopify is unlikely to stop at solely offering its current set of solutions through system integrators, but will strive to expand into other adjacent solutions as part of Shopify Plus subscription plans, to conquer the full suite commercial solutions. Thereby not only mitigating third-party integration risks, but also expanding its total addressable market to drive stronger revenue growth going forward.
As Shopify President Harley Finkelstein discussed on the Q3 2022 earnings call:
Whether it’s Deloitte or it’s KPMG, Ernst & Young, there’s a lot of large brands that prefer to work through an SI when they are digitalizing or they’re modernizing the retail operations. And by partnering closely with these SIs and becoming their preferred enterprise e-commerce solution, we think we can see more merchants come on faster.
The overarching goal is to make Shopify’s e-commerce tools the favored set of commerce solutions among systems integrators, inducing consultants to increasingly advocate for Shopify Plus integrations across their client bases. The strategy’s success essentially relies on Shopify’s ability to execute effectively. The better the execution for systems integrators’ large clients, the more willing consultants will become to endorse the use of Shopify’s commerce solutions in the interest of optimizing the value and success of their own professional services. If executed successfully, this gambit will serve as a self-reinforcing sales strategy, with professional consultants ultimately acting as devoted sales agents on behalf of Shopify. Shopify’s impressive track-record of growing the Shopify Plus merchant base is testament of its ability to execute successfully, hence this new strategy promises strong growth potential going forward.
Price to Sales (P/S) multiple
Deeply integrating Shopify’s commerce solutions into large enterprises’ core business operations through professional consultants’ endorsements creates sustainable and high-quality revenue streams, therefore enabling Shopify’s stock to command a higher sales multiple. The unfavorable macroeconomic backdrop and increasing fears of a recession have severely pummeled the stock over the past year, resulting in a compressed sales multiple at around 8.95x. The market is currently under-appreciating Shopify’s high-quality revenue growth potential.
While further compression is certainly possible amid a worsening economic outlook, the 80% drawdown has already created a compelling entry point from a valuation stand-point. The e-commerce platform has been able to continue growing Gross Merchandise Volume [GMV] faster than U.S. retail (15% vs. 9% in Q3 2022, respectively), despite the dire macro backdrop. Shopify is indeed a solid growth stock with promising future growth prospects. Therefore, investors seeking long-term exposure to Shopify should start buying the stock at this attractive P/S multiple.
Summary
The merchant acquisition strategy via systems integrators (like Deloitte and EY) offers strong revenue growth potential through accelerated penetration of its premium subscription plan, Shopify Plus. The higher and stickier sources of revenue through this strategy enhances the quality of Shopify’s revenue generation, making the current 8.95x sales multiple an attractive buying opportunity.
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