Shopify: Why They Don’t Need Your SaaS

“Amazon is trying to build an empire and Shopify is trying to arm the rebels.” – Tobi Lutke

What is Shopify?

Simply put, Shopify is a “complete commerce platform that lets you start, grow, and manage a business.” From website creation to managing orders, payments and fulfilling orders, Shopify is helping customers at every turn.

The Narrative Behind Shopify

Shopify trades at SaaS multiples, but it is losing its SaaS GM%. Why? Shopify has gotten messy. They veered out of the software business and started getting involved in the logistics business. Logistics is a rough business and it will dilute profitability. Why get involved? Because it’s what the merchant needs! Logistics isn’t only a messy business for Shopify, it’s an even messier business for the merchant. The merchant will pay you to take care of that mess plus it protects your original business as well.

The easiest thing for Shopify would have been to not enter the logistics business, but that is the beauty of Shopify. They don’t do what is easiest for them, they do what is easiest for the merchant. It’s no surprise with this merchant focus, Shopify has been growing like gangbusters. Current estimates are that Black Friday sales through Shopify were up 75%.

Shopify simply creates tools (websites, logistics, etc…) for its merchant’s to use. Businesses are always running into new challenges and Shopify is positioned to solve those problems. I wouldn’t be surprised if 10 years from now, Shopify was a completely different company. Shopify has optionality and proven it can take advantage of optionality in the past (expanding into merchant services, then logistics). Optionality will also continue to feed the fly wheel as Shopify continues to solve more merchants problems, which will lead to more GMV, which will lead to more problems to solve! Shopify does have a lot of other items in motion (Shop app, Shopify Capital, etc..)


Shopify doesn’t need to know which merchants will win. They just need to create the tools to help all merchants win (and some win big). In doing so, Shopify will continue to win big. Shopify is in a competitive industry, but in my opinion, none of the competitors come close (other than $SQ of course)!


Shopify is a crazily valued stock. At 36.9x NTM sales, significant growth is needed to justify that valuation. The other complication is that the optionality Shopify has shown isn’t at SaaS margins. Not only do they have a steep price to sales ratio, they also have declining margins and increasing capital expenses. But, Shopify doesn’t need to be SaaS and they should be more than just SaaS. The best businesses do real things (I swear I’m not a boomer). The declining margins are more than made up for by the new sales from fulfillment, etc…

The valuation is tough, I’d love to get this stock cheaper. But that is true of all stocks. A quick DCF will show that what DCFs always show… that the valuation is either very reasonable or absurd… depending on your inputs. Whether the valuation is unreasonable really comes down to three key things.

  1. How long will Shopify keep growing?
  2. How fast will Shopify keep growing?
  3. How profitable will Shopify be?

All of these are very difficult questions to answer, but can be simplified into two easier questions:

  1. Do you trust management?
  2. How large is the TAM?

To me, the answer is yes and huge. It might be a bumpy ride, but I do think it will be a profitable one (both for Shopify and my portfolio). Like most stocks, I expect the valuation to be cut in half at some point (could be for a number of reasons). The problem is, when will that happen? No clue. So, I’ll buy some now, some later. Shopify has shown significant optionality in the past and I believe they will continue to. Small businesses face new problems every day and Shopify has shown they are willing to get messy to help. I like that.

Author: fatbabyfunds