Shopify keeps Outperform rating with ATB Capital

There are a lot of moving pieces to the e-commerce picture, and we’re not talking about packages. One major question is how will the sector fare now that COVID is more or less behind us and stay-at-home shopping is once again a choice rather than a necessity? And for fans of Canadian e-commerce behemoth Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), how will its many growth initiatives turn out, especially in the context of competing forces in both online sales and fulfillment?

ATB Capital Markets analyst Martin Toner waded into these waters in a report to clients on Thursday where he detailed a recent conversation with a key opinion leader in the e-commerce space, coming away with a more nuanced picture of where Shopify’s pressure points might be found going forward.

Toner spoke with Rick Watson, Founder and CEO of RMW Consulting, who specializes in e-commerce strategy and whose clients include retailers and direct-to-consumer (DTC) brands, many of whom are Shopify merchants.

On the health of the e-commerce space in general, Watson said growth rates for companies are in the mid-teens but that the landscape has evolved in recent years. No longer is it a case of “all categories go up,” as economic conditions have made it more difficult for inflation-sensitive sectors. Further, Watson said he’s not seeing as many DTC brands built from scratch these days, which was more common during the pandemic.

On Shopify, Toner and Watson spoke of the threat from Amazon’s Buy With Prime (BWP) initiative, launched last spring, which allows Prime members to shop with third-party merchants on their own sites while still retaining the benefits of free delivery, free returns and so on that were previously only available for shopping through Amazon itself.

BWP presents obvious challenges for Shopify and its merchants, where SHOP has warned its merchants that working with BWP effectively violated its terms of service. Nevertheless, Watson said Amazon will ultimately have to work with Shopify if BWP is to succeed, while Shopify will be at pains to preserve its payments penetration in the online commerce space.

“Anecdotally, [Watson] has not seen any uptake of BWP from his customers, as the lack of functionality discourages adoption,” Toner wrote. “Moving inventory to Amazon’s facilities is a significant barrier to adoption of BWP, in [Watson’s] opinion. [He] notes that these items are on Amazon’s roadmap, as the Company is early in its journey.”

Watson also expressed concerns over the viability of Shopify’s Fulfillment Network (SFN), saying that there’s no real precedent in business where a software company became successful in fulfillment. He also pointed out how Shopify’s merchants are “poor fulfillment customers,” since they’re often small and heterogenous, with low volumes and costly customization requirements.

But Shopify’s presence in the e-commerce market isn’t going anywhere, according to Watson.

“Overall, [Watson] was positive on the value proposition of Shopify’s platform, and his observation was that Shopify is the de facto standard for DTC brands,” Toner wrote.

With his report, Toner maintained an “Outperform” rating on SHOP and one-year target of C$82.00, which at press time represented a projected return of 14.8 per cent.