Shopify (TSX:SHOP) is the Amazon (NASDAQ:AMZN) of Canada. Powering $236 billion a year in sales and doing $7.1 billion in annual revenue, it is fast on its way to becoming a true e-commerce giant. Shopify already has some of the world’s best-known celebrities and brands on its platform, and its gross merchandise volume (GMV) is already half of Amazon’s revenue level ($576 billion). Of course, Shopify only turns about 3% of its GMV into sales, so this isn’t an apples-to-apples comparison. Still, it goes to show what a major player Shopify already is.
The question is, how much bigger can Shopify get from here? The company is already Canada’s biggest non-bank by market cap and the third-biggest Canadian company overall. Can it really continue getting bigger — potentially as big as one trillion dollars?
Limitations to Shopify’s growth
Although Shopify has plenty of growth potential today, its business model limits its ability to reach an Amazon-like revenue level. The reason is it converts only 3% of GMV to sales. Let’s take Amazon’s $576 billion as indicative of how much revenue you’d expect at a $1 trillion market cap. To get to that revenue level, converting 3% of GMV, Shopify would need to do $19.2 trillion in GMV per year! That is approximately a quarter of global GDP. Unless Shopify is going to become the biggest economic entity on the planet, it would seem that getting to an Amazon-like market cap is unlikely.
Nevertheless, Shopify doesn’t have to do exactly the same amount of revenue that Amazon does to be worth a trillion dollars. For one thing, Amazon is closer to two trillion than a trillion — if it’s valued correctly, then it is not a benchmark that Shopify must hit to be worth a trillion. Second, Amazon has very thin profit margins. Apple and Google both have far less revenue than Amazon does, yet they make much more profit. So, Shopify needn’t necessarily hit Amazon’s sales level to be theoretically “worth” $1 trillion. It’s profit that determines the value of a company, not sales.
Shopify’s growth rate
As we’ve seen, it would take a lot for Shopify to hit a level of revenue comparable to Amazon’s. However, it could be done. Although Shopify only converts 3% of GMV to revenue today, it could capture much more revenue and profit than it is currently capturing. For example, it could do so by adding more services to the lineup of services it offers its vendors, which are currently limited to basic payment processing and a website builder. Advertising support could be added to these services, a “one-stop-shop” sales platform similar to Amazon dot com, and so much more. Even just one new, popular service could lead to Shopify capturing more revenue from its customers than it is doing currently.
That could lead to revenue acceleration. Although Shopify’s 2023 growth rate was down from previous years, when it went as high as 90%, the addition of new vendor services could cause things to pick up again. That, in turn, could lead to renewed interest in Shopify stock.
The final verdict
Taking everything into account, I think Shopify certainly has the potential to be a $1 trillion stock, but it’s not a sure thing. It depends on the company executing certain business model improvements that will be needed for it to capture more revenue per customer. If it executes, it could easily get to a trillion. If it doesn’t, it may not have much room to run from here.
