How it came to be valued at $191 billion

Value of Ottawa-based retail giant pegged at 42 times estimated revenue for 2021

At a certain point, you run out of superlatives to describe what Shopify has accomplished in the six short years since it began selling shares on stock exchanges in New York and Toronto.

Consider the short list:

The number of retailers using Shopify's online platform has jumped from 244,000 to more than two million.

Partly as a result, quarterly revenues at Ottawa's e-commerce enabler have surged from $45 million to $1.1 billion, according to its second-quarter report, released Wednesday (all figures U.S.)

The company's head count now tops 10,000, compared to less than 1,000 in 2015.

And, most remarkable of all, Shopify's market value has exploded to $191 billion — up from a slender $1.3 billion after its initial public offering.

Shopify's ambitions, of course, don't end there. Harley Finkelstein, the firm's irrepressible president, talked Wednesday about Shopify's end game, which is building a retail operating system to transform “the future of commerce.”

Although Shopify warned Wednesday that its pace of growth was slowing as people gradually return to shopping in physical stores, the underlying shift toward e-commerce still appears strong.

In the U.S., the source of nearly 70 per cent of Shopify's revenues, e-commerce revenues this year are expected to make up 15 per cent of total retail sales, compared to 11 per cent in the pre-pandemic year of 2019, according to eMarketer. Further, eMarketer predicts online sales will comprise nearly 24 per cent of total retail revenues by 2025.

Unlike e-commerce giants such as Amazon and Walmart, Shopify doesn't sell directly to consumers. Instead, it develops technology and apps for smaller retailers that do. The combined revenues of Shopify's customers approached $80 billion in the first six months this year. Even if the U.S. portion of these remains flat for the remainder of the year, Shopify's network of retailers will account for 12 per cent of estimated e-commerce sales this year in the U.S. — well behind Amazon's 40 per cent but ahead of Walmart's seven per cent share.

Earlier this week, analysts had forecast Shopify's total revenues this year would top $4.45 billion — up 52 per cent from 2020 — and would hit $5.9 billion in 2022, up another 32 per cent. These projections aren't likely to change much after the second-quarter results.

What may change — though there is certainly no guarantee — is investors' perception of Shopify's stratospheric market valuation. The company's market value at close of trading Wednesday was $191 billion — 42 times estimated 2021 revenues. In the wider tech universe, a ratio of 10 times revenues is considered expensive. But even in the rarefied atmosphere of e-commerce startups, that's rich. The market value of two of Shopify's biggest competitors — BigCommerce and Lightspeed Commerce — is less than 25 times projected revenues.

It's a stunning contrast with the three firms that dominate the Kanata skyline — Ericsson (wireless infrastructure), Nokia (IP networking) and Ciena (optical networking). They have a combined market value of $80 billion, yet this represents just 1.4 times this year's projected revenues.

An even starker comparison is this: Shopify's valuation equates to about US$19 million per employee while the combined market value of the big three works out to just $400,000 per employee.

Is Shopify really that much more efficient at generating revenue? In some ways, yes. Shopify has the great advantage of starting with a clean slate. Any new sale it wins, is money added to the heap. Ericsson, Nokia and Ciena are all seeing rapid growth in sales of infrastructure related to 5G wireless and other new technologies, but this is accompanied by revenue declines related to older product lines. Overall, these firms expect to grow five to 10 per cent annually.

Nevertheless, there's a great disconnect locally. The big three, which employ 5,000 in the Ottawa area, operate significant global R&D labs, giving the companies a very tangible presence. Most of the workers are expected to return to their offices and labs post-pandemic, albeit on a hybrid schedule.

In sharp contrast, Shopify is nearly invisible locally. Although it employs an estimated 1,200 here, the company sent them to work from home at the beginning of the pandemic and appears to have no intention of bringing them back. Shopify noted on Wednesday that it's still assessing what to do with the offices it didn't write off last year.

Indeed, the e-commerce enabler really is becoming a most ethereal firm. A check with LinkedIn reveals Shopify's workers are scattered, with hundreds each in the Philippines, Morocco, India and Ireland. Hiring has been rapid in the U.S., Toronto and Vancouver. Ottawa, the city of its origin, is no longer the single biggest centre of operations. That distinction belongs to Toronto.

As is common with successful and young high-tech firms, the rewards have been distributed unequally. Up to 40 per cent of Shopify's workforce consists of modestly (but competitively) paid remote employees who help Shopify customers set up websites and sort through the various technologies and apps on offer.

Employees who joined as recently as two years ago have done nicely with stock options, though not as well as the firm's top five executives. Led by CEO and founder Tobit Lütke, the executives have collectively exercised options for gross proceeds of more than $1 billion since 2015.

But whatever personal profits were made, a good chunk were available to investors as well. Shares acquired at the IPO for $17 closed Wednesday at $1,540.

Investors yesterday appeared to be undecided about the meaning of Shopify's second-quarter results, bidding the shares down nearly four per cent at one point.

But that is a very short-term view of a company that is peering very far into the future. Ericsson, Nokia and Ciena are examples of what Shopify could one day become — truly giant multinationals with vast operations and products of varying ages.

Even if Shopify continues growing beyond next year at 25 per cent annually, it will take seven or eight years to reach the level of revenues generated by Ericsson or Nokia.

Whether Shopify gets there without significant missteps is anybody's guess. Investors contemplating getting in now might have a look at the list of risks included with Shopify's latest filing. One short paragraph tells the tale:

“We believe that our future success is dependent on many factors, including our ability to expand our merchant base, retain merchants as they grow their businesses on our platform, offer more sales channels that connect merchants with their specific target audience, develop new solutions to extend our platform's functionality and catalyze merchants' sales growth, enhance our ecosystem and partner programs, provide a high level of merchant support, hire, retain and motivate qualified personnel, and build with a focus on maximizing long-term value.”

Simple, really.

We believe that our future success is dependent on many factors, including our ability to expand our merchant base.