what happened to shopify

INTRO: When we think of the most volatile assets  ,within the financial space, most of us think about  crypto. Despite reaching a market cap of over  ,$1 trillion, Bitcoin still experiences 70 to 80%  crashes on a regular basis. Within the crypto  ,markets, these are actually rather tame crashes  given what happens to certain altcoins like Luna.  ,Anyway, as you guys probably already know, Bitcoin  is currently experiencing one of these bear  ,markets having sold of 71% since November. The  most ironic part, however, is that Bitcoin has  ,actually held up better than some of the  most reputable and well known businesses  ,in the world such as Shopify. Since November,  Shopify is down 82.6%, and let’s not forget,  ,Shopify is not some penny stock or options  contract. They were the second biggest  ,ecommerce player in the world only beaten out by  Amazon. And at the peak, they were $228 billion,  ,but now, they’re only worth $38.5 billion. This  means that within 8 months, Shopify has lost $190  ,billion worth of maket cap. Now of course, you  could argue that the entire market is crashing,  ,and that’s true. But, to my knowledge, Shopify  is thus far the worst performing large cap  ,company in the world. So,  what happened to Shopify?,THE DROPSHIPPING BUBBLE: ,One of the driving forces of Shopify over the  past few years has been the dropshipping bubble.  ,I mean, how many times have you heard  about teens making 6 if not 7 figures on  ,Shopify every year. And, let’s not forget about  all those dropshipping and Amazon FBA gurus on  ,YouTube. Now, I’m not trying to say that all of  these guys are scams or that dropshipping doesn’t  ,work. Dropshipping is absolutely a viable business  model and people who really know the business will  ,do well regardless of how competitive it gets.  With that being said though, the vast majority  ,of people who are getting into dropshipping  aren’t looking to start a series business.  ,A lot of them are trying to make some quick  money on the side, and this was especially true  ,at the beginning of the pandemic. In  April and May of 2020, the interest in  ,shopify literally doubled. And it wasn’t just  entrepreneurs that were interested in Shopify.  ,Investors were also quite intrigued by the idea.  Most investors didn’t want to start their own  ,stores or anything, but they were quick to  identify all of the extra interest heading  ,towards Shopify. And as hopeful entrepreneurs  piled on on the customer side, investors piled  ,on on the investor side, and it wasn’t long  till Shopify stock was sent to the moon.  ,From the pandemic bottom, Shopify stock would  grow nearly 500% within a matter of months.  ,While this likely felt super rewarding to Shopify  investors, this was also completely unsustainable.  ,Shopify’s PE ratio or price to earnings ratio  went to extreme levels of over 600. Now,  ,it should be noted that Shopify has historically  reinvested the vast majority of their profits,  ,so their net income is abnormally low which  skews their PE ratio, but this does not  ,apply to their PS ratio. Shopify’s PS ratio or  Price to Sales ratio also skyrocketed to 53.  ,To put that in perspective, even Tesla only had  a peak PS ratio of 24 meaning that according to  ,this metric, Shopify was valued twice as richly  as Tesla. Clearly, this was a hyper valuation  ,that was just waiting to crash, and that’s exactly  what would happen as the new interest in Shopify  ,fell off a cliff. Here’s the thing, most people  who try dropshipping don’t actually make it.  ,In fact, nearly 90% of dropshippers quit within  the first month after not making as much money  ,as they originally envisioned. This number  rises to 96% if we zoom out to the first 6  ,months of business. Out of the remaining 4%,  it’s likely that a good portion just continue  ,to treat dropshipping as a side business. They  might make 2 or 3 thousand dollars every month  ,which is great supplemental income, but not quite  enough to quit your job over especially given how  ,volatile dropshipping income can be. Considering  this, only about 1 to 2% of dropshippers  ,actually end up becoming long term customers  of Shopify who make them a lot of money. And  ,this becomes abundantly clear when we take  a look back at the google trends graph.  ,The new interest in Shopify died off as quickly as  it went up. And as the hype amongst entrepreneurs  ,died off, it was just a matter of time until  the hype amongst investors also died off.,AWFUL QUARTERS: ,As new entreprenuer interest died off, it was only  natural that Shopify’s financials reflected that  ,sooner or later, and that’s exactly what’s been  happening over the past few quarters. Revenue and  ,profit growth has slowed down, and Shopify expects  these metrics to slow down even more in the coming  ,quarters. Hearing that, you’d probably think that  Shopify’s revenue was down 50% or something, but  ,that’s not actually the case. In fact, Shopify’s  12 month revenue and gross profit are still higher  ,than ever before. Not to mention, neither of these  metrics have ever gone down on a 12 month basis.  ,But, investors are fearful that Shopify is close  to posting their first year over year contraction.  ,If we take a closer look at Shopify’s year over  year growth in gross profit, you’ll see that this  ,growth rate is lower than we’ve ever seen. Shopify  has historically posted 80 to 90% growth quarter  ,after quarter, but today, this growth has dwindled  down to just 14%. Now, I know this makes a lot  ,of people in the comments quite frustrated  because it’s completely unrealistic to expect  ,that a company grows forever. 14% year over year  growth is still a great number from a fundamental  ,perspective. But the thing to keep in mind is  that the stock price had priced in over 50% annual  ,growth for years to come. So, a mere 14% was  simply not enough to appease investors. Something  ,else to note is that Shopify’s financials aren’t  as peachy when we take a look at their net income.  ,Shopify’s net income has never been particularly  high given that they just reinvest everything,  ,but since the end of 2020, Shopify’s net income  was finally starting to reach respectable levels  ,until the last 2 quarters. During these quarters,  Shopify lost $371 million and then $1.47 billion.  ,These losses can be traced back to  a couple of factors starting with  ,increasing operational expenses. Shopify is  spending significantly more across the board.  ,Sales and marketing has increased from  $186 million to $303 million. Research  ,and Development has increased from $175 million  to also $303 million. General and administrative  ,have increased from $67 million to $108 million.  And finally, transaction and loan losses have  ,increased from $10 million to $20 million. As you  can see, all of these operational categories have  ,increased by atleast 60%. Meanwhile, revenue has  only increased from $988 million to $1.203 billion  ,or roughly 21%. It seems that Shopify has yet to  account for diminishing growth, and that they’re  ,spending as if they were still growing at 70 to  80% per year. Aside from increasing operational  ,expenses, Shopify has also gotten destroyed  with their investments given that they’ve  ,mostly invested in hyper growth companies like  Affirm, Global-e, and Silvergate Capital which  ,are all down 70 to 90%. Such investments were the  driving factor behind Shopify’s external loses  ,of $1.55 billion last quarter which left  them with a horrendous quarterly report.,FUNDAMENTAL ISSUES: ,Aside from these superficial factors that are  affecting Shopify’s stock price and bottom line,  ,Shopify has a few fundamental issues as well  starting with dropshipping. Today, Shopify has  ,basically become synonymous with dropshipping,  and honestly, it’s probably where a significant  ,portion of their revenue comes from. But, Shopify  was never created to support dropshipping.  ,The purpose of Shopify was to make it easier for  small merchants to set up an online store. But,  ,dropshippers aren’t merchants at all. They’re  actually just marketers who route orders to  ,Ali express. This might not sound like a big  deal at first glance, but it is a big deal  ,for two reasons. First of all, people associate  Shopify with fake gurus and get rich schemes.  ,And secondly, the products that are sold on  Shopify are garbage quality because all the money  ,is being spent on marketing. Now, I’m not  against marketing by any means. Spending  ,20% of your revenue on getting new sales makes  perfect sense as a business. But, dropshippers  ,generally spend over 50% of the revenue on  marketing. If we have a $50 product for example,  ,this is usually how the breakdown goes. The  dropshipper spends $10 on the product itself,  ,they spend $30 on marketing, and then they  keep $10 for themselves. Because of this,  ,a $50 product from Shopify is usually not even  comparable to a $50 product from a physical  ,retailer in terms of quality and longevity,  and consumers are starting to notice. Recently,  ,I posted a video about how physical retailers  are making a comeback against online retailers,  ,and one of the top complaints that I saw in  the comment section was that goods from online  ,retailers are simply trash quality. This user  commented “I’d like to add that as of today,  ,on Amazon, most categories are flooded with the  same chinese low quality products but rebranded,  ,so for a lot of items it’s just quicker to find  them in a store”. And this guy was just talking  ,about Amazon. The quality problem is exponentially  worse on Shopify, and this is no doubt ruining  ,their brand image. One way that Shopify is trying  to move away from dropshipping is by growing their  ,own logistical services. They’re hoping that by  offering small businesses logistical capabilities,  ,they can attract higher quality clients. With  the help of Shopify, these small businesses  ,would finally have the opportunity to offer  shipping times and prices that are competitive  ,with Amazon and Walmart. The only problem with  this is that its basically just Amazon FBA.  ,The idea itself isn’t bad per se, and I’m not  really worried about Shopify being able to attract  ,enough customers. The real problem, however,  is that developing something like Amazon FBA  ,is extraordinarily expensive. I mean,  Amazon launched the FBA program in 2006,  ,and they’ve spent the past 16 years refining  every portion of the business. But despite this,  ,Amazon still posted an operational loss for  their retail business last quarter. So, clearly,  ,if Shopify doubles down on logistics, they’re not  going to be posting sizable profits anytime soon  ,meaning that the stock may still  have a lot of room to the downside.,THE FUTURE OF SHOPIFY: ,I know this video has been extremely negative  towards Shopify, but I don’t want to give off  ,the impression that Shopify is struggling per se.  Yes, their stock price has gotten obliterated and  ,they’re experiencing some painful quarters due to  rising operational expenses and some large write  ,offs . But, in the grand scheme of things, Shopify  is still an ecommerce giant and they are the go  ,to service for creating online stores. With that  being said though, a lot of their growth in recent  ,years has come from dropshipping which is not  the best for their long term business. After all,  ,I don’t think Shopify wants to be  an American gateway to Ali express.  ,Their real goal is to become small merchants’ best  friend, and that’s exactly what they’re trying to  ,do with their logistical services. But this is  by no means a small undertaking, and it’ll take  ,several years for such a plan to produce returns.  In the meantime, Shopify will likely post little  ,to no profits. And in our current risk off market,  that’s basically a death sentence and I wouldn’t  ,be surprised if Shopify ends up selling off 90-95%  before finally bottoming. If you’re willing to  ,hold through this potential short term volatility  however, Shopify will likely be a phenomenal  ,investment 10 years down the line, but that’s just  what I think and it’s not financial advice. Are  ,you guys a fan of dropshipping? Comment that down  below. Also, drop a like if you wish that online  ,products weren’t garbage quality. And of course  consider joining our discord community to suggest  ,future video ideas and consider subscribing  to see more questions logically answered.

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