Shopify Just Threw a Big Lifeline to Meta Platforms and Alphabet

The company’s digital advertising tools bypass Apple’s privacy measures.

| More on:
Happy shoppers look at a cellphone.

Source: Getty Images

First published on Fool.com

In early 2021, Apple turned the digital advertising world on its head. With a change to iOS 14, iPhone users were notified when an app wished to track their activities and were required to opt in to allow it to continue. This put a multibillion-dollar dent in the online advertising last year, disrupting companies including Alphabet‘s (NASDAQ:GOOGL) (NASDAQ:GOOG) Google and Facebook parent Meta Platforms (NASDAQ:META), which rely exclusively on targeted ads for the lion’s share of their revenue.

Now, an unlikely alliance with Shopify (TSX:SHOP) is seeking to restore some of the status quo while providing the software-as-a-service (SaaS) company with a potentially lucrative growth engine.

Know your audience

Last year, Shopify debuted Audiences, a tool designed to identify and target high-interest buyers with digital advertising. The system aggregates input from cooperating Shopify Plus retailers, providing merchants with a way to pool their customer data. 

The resulting information can then be uploaded to Google and Meta’s digital ad systems and used to target comparable customers or those who bought similar products from other retailers. This helps merchants with one of their biggest challenges: discovering new customers that are ready to buy.

When it launched in early 2022, Audiences integrated with Facebook and Instagram ads but recently expanded to include Google Search, Google Display Network, Gmail, and YouTube. 

Furthermore, Shopify recently upgraded the capabilities of Audiences, allowing merchants to include all the product categories within their stores rather than focusing solely on specific items. This gives retailers many more options for targeting potential customers, allowing them to focus on greater reach, driving conversions, or both. Audiences can also handle multiple advertising campaigns — with differing objectives — at the same time.

Perhaps the best thing about Shopify’s Audiences is that it’s designed to sidestep Apple’s consumer privacy measures as it incorporates merchants’ first-party data in order to target customers most likely to make a purchase. This acts as an important lifeline to Meta Platforms — and, to a lesser extent, Alphabet — as both companies have been adversely affected by Apple’s policies while also providing an important growth area for Shopify. 

Taking a page from Amazon’s playbook

The process of aggregating data from its merchants to identify high-interest buyers takes a page directly from the playbook used by e-commerce rival Amazon (NASDAQ:AMZN). Over the past several years, advertising has become a key growth area for Amazon.

The e-commerce giant has quickly ascended the ranks to become the third-largest digital advertiser in the U.S., behind just Alphabet and Meta Platforms. In the third quarter, Amazon’s ad revenue of US$9.5 billion jumped 30% year over year (excluding currency fluctuations), outpacing both its rivals.

Audiences provides merchants with similar ad-targeting capabilities offered by Amazon while expanding beyond the limits of a single digital retail marketplace — including Google search, Instagram, and YouTube. 

This suggests that if Shopify can recreate even a portion of the advertising success of its biggest rival, this could result in an important new market for the company at a time when online sales are down.

After generating near triple-digit growth at the height of the pandemic, Shopify’s third-quarter revenue grew 22% year over year, weighed down by tough comps, a strong dollar, and slowing e-commerce adoption. Adding a potentially lucrative revenue stream would give Shopify a much-needed boost at a critical juncture in its history.

The opportunity is significant

Shopify is prioritizing investments with a “much shorter-term payback” period, and Audiences is an area of key focus, according to Harley Finkelstein, Shopify’s president. “Especially right now, merchants want to be able to find more customers,” Finkelstein said recently. 

While estimates vary, the internet advertising market is expected to top US$700 billion in 2023, growing to more than US$1 trillion by 2027. If Shopify can carve out even a small segment of the market for itself, this could mark the next stage in the company’s growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Alphabet, Amazon.com, Apple, and Meta Platforms. The Motley Fool has a disclosure policy.

More on Investing

Target. Stand out from the crowd
Investing

2 Canadian Stocks I’m Buying Lots of This Year

I’m looking to snatch up exciting Canadian stocks like VieMed Healthcare Inc. (TSX:VMD) throughout 2023.

Read more »

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Investing

2 TSX Stocks Safer for Investing in a Recession

These consumer companies will likely beat the broader market averages amid a recession. These stocks offer stability, income, and consistent…

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »