Shopify’s stock soars on news of Amazon partnership

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Canada's hottest tech stock received a shot in the arm Thursday when Amazon.com announced it would partner with Shopify Inc. to provide web stores for third-party merchants.

Investors cheered the news, sending the stock up 23 per cent in heavy trading on the New York Stock Exchange, closing at $35.55 (U.S.).

Seattle-based Amazon, one of the world's largest e-commerce platforms, doesn't disclose how many of these merchants sell on its Amazon.com sites, although in July it announced those partners – which list their goods alongside Amazon's own inventory – accounted for 45 per cent of units sold, up from 41 per cent a year earlier.

Since 2006, Amazon has provided the Webstore platform for its merchant partners to set up their own direct-sales sites. But in March of this year, it announced it would be shutting down that platform, ending service in mid-2016. As of today, Ottawa-based Shopify has been chosen as Amazon's preferred partner for those Webstore clients looking for a new home.

"We're pumped about it," said Harley Finkelstein, chief platform officer at Shopify, adding that Amazon approached Shopify with the offer of a partnership. "Even before Shopify was around, Amazon was a very, very big player in this space, so to have one of these players shut down one of their products and endorse our product, it's wonderful."

Shopify has more than 175,000 web store customers worldwide, many of whom already sell on Amazon. As part of this deal, all of Shopify's customers will soon be able to list on Amazon, as well.

"Amazon Webstore targeted very small online merchants and so does Shopify," said Scot Wingo, chief executive officer of ChannelAdvisor, a publicly traded company that matches smaller sellers with bigger online marketplaces.

Another element of the deal is that Shopify will also now extend Amazon's own payment processing system to its existing customers. "With the addition of Amazon Payments on Shopify, it looks like a bit of a horse trade for Amazon. e.g. 'We will send you our store folks if you add Amazon payments' kind of deal," Mr. Wingo said in an e-mail.

Amazon takes about 10 per cent of any sales made by third-party merchants using its e-commerce platforms, which can be a cheap way for the mega-retailer to expand its inventory. Its payment service charges sellers a 2-per-cent fee for transactions.

Shopify's revenue comes from two main sources: software subscriptions to its e-commerce platform (which should get a boost from the Amazon sellers, who will get a free introductory month) and it offers its own built-in payment processing service for a fee, in partnership with Stripe.

"We believe the future of retail is selling wherever you have customers," Mr. Finkelstein said, and Shopify provides services that include online stores, physical point of sales, mobile point of sale, and recently announced deals with Facebook and Pinterest to put "buy" buttons on those sites.

"We want our merchants to be able to sell on all those places and it all gets fed back into Shopify's back office, which allows our merchants to go to one place to run all their sales."

Richard Davis, an analyst with Canaccord Genuity, stuck by his "hold" recommendation on the stock, which he issued back in July. At the time, he noted Shopify was pricey and trading at almost 12 times expected 2016 enterprise value (EV) to revenue, "which makes it the most expensive software stock that we track (even adjusting for growth). The comparative valuation gap is even greater when you look at EV/gross margins (which are in the mid-50-per-cent range)."

And Shopify stock has been on an upward trend since its public debut in May, rising by 70 per cent. Shopify beat revenue expectations with its its first earnings report in July, reporting $44.9-million in revenue, up 90 per cent year over year. It predicted $182-million in annual revenue for 2015, again above analyst expectations. It's still losing money though, and is expected to throughout 2016.

Mr. Davis's take is that even if Shopify meets 53-per-cent revenue growth for the year, the valuation may still be too frothy for most investors.