Shopify, e-commerce eats finance

The last session of the Fintech Product Guild `10k-a-month club` was centered around one the most interesting companies in circulation: Shopify.

Shopify was established with the goal of making e-commerce very simple for anybody: the company provides a set of tools to bootstrap an online shop and essentially remove a lot of technical hurdles from the setup of an e-commerce, letting entrepreneurs focus on the commercial side of the venture.

Recently, they started adding a comprehensive set of financial features to their product, embodying the paradigm of embedded finance that I already touched in one of my previous posts.

The goal of this post is to deep-dive into these features and analyse their strategic impact.

Financials analysis

Income statement

Shopify grew massively in the last 12 months, reaching over 1 million merchants on the platform and a GMV (Gross Merchandise Volume) of more than $60bn. 

This is obviously an insane number, but it’s still less than a third of what Amazon generates through its Marketplace business, and less than 20% of Amazon’s entire GMV .

Shopify vs Amazon GMV – Source: MarketplacePulse

That GMV translates into $ 1.5 B revenues split between subscription and merchant solutions.

The subscription product is essentially the access to the e-commerce platform and was crucial to jumpstart the company, but the merchant solution is where the company is investing more and where they probably expect to build a moat.

Shopify Income Statement common size analysis

Merchant solutions now accounts for 59% of Shopify’s revenues, and counting. This line includes a constellation of extra services that support the merchant in many non-commercial activities, such as:

  • Shopify Payments 
  • Shopify Shipping and Fulfillment
  • Shopify Capital

Balance Sheet

Shopify’s balance sheet is really a fortress with minimal leverage and a lot of cash available.

Shopify Balance Sheet common size analysis

Statement of Cash Flows

Shopify’s statement of Cash flows is very insightful, as it really shows a company in its growth phase: the financing flow started to go down but is still very strong, the operating flow starts to take off and the investing one is diminishing but still deeply negative.

Shopify statement of cash flow, in the company-stage SCF curve

Leveraging the platform: embedding finance

The last Shopify Reunite saw a number of announcements with Money and Financial features at the centre of the stage. Many of their products pose a direct threat to many incumbents and pure Fintech startups:

FeatureThreat to:
Shopify balance: A business banking account and loans for merchants. No fees or minimum balances. This will include a Shopify customized virtual and/or physical debit card and cash-back cardsRetail banks, neobanks for SME. Any new e-commerce will probably use either Shopify or Amazon. They will easily be acquired also on the banking side.
Shopify Capital: The company expanded their lending infrastructure. Lent $1 billion to merchants so far, in ticket sizes ranging from $200 to $1 million.Retail banks, SME lenders.
See above, only for lending (with better underwriting opportunities).

They also announced some customer-facing features that want to rival with more customer facing brands:

  • Installment payments via Shop Pay, with the option for users to break purchases into 4 even payments at 0% interest.
  • Shop App: Less fintech and more Amazon competitor, with better merchant features and 16 million users so far.

To be honest, I’m very skeptical about this consumer-facing twist: first, building a consumer brand that rivals Amazon or even Facebook is extremely complex and defocusing for a platform company; second, and more important, this also introduces a mismatch of incentives between Shopify and its customer base: the merchants. 

One of the perceived value of Shopify over Amazon, is the fact that Shopify is considered a tech partner that doesn’t want to screw you up because it doesn’t consider your margin its opportunity. This partnership narrative may be at risk in a more prominent D2C role.

Looking ahead

Shopify is an extremely solid company, with a great outlook for the future. They are placing themselves at the center of the future of commerce, providing a comprehensive infrastructure that makes the life of the merchants much easier, and let the company focus on serving customers better and with minimal financial and logistic hussle.

Their focus on financial features is the nth signal that embedded finance is a key trend that also other platforms are embracing (see Amazon partnership with Goldman Sachs). 

In this world, incumbents and pure fintech startups have to find a way to clearly define themselves, but I’ve already tackled this point 🙂 .


Resources

Adyen, payments made easy

As my fellow Product Peon taught me a long time ago, the best way to learn quickly how a specific company works, is to analyse its 10k. For this reason, in the Fintech Product Guild, we decided to start a ’10k-a-month’ club. This month we analyzed Adyen, a payment company.

What does Adyen do?

Adyen was founded around 15 years ago to facilitate the adoption for merchants of electronic payments. At that time, the payment chain was extremely fragmented with multiple players coordinating different pieces of the chain: gateway, processing, risk management, acquiring (more on the evolution of the payment industry here). Adyen approached the problem from a different perspective: they built a merchant centric product, a payment-as-a-service infrastructure which essentially made the process of accepting a payment much easier for their merchants.

The venture went very well, they secured a lot of fundings and went public in 2018. Today Adyen is a public company which offers a payment platform to support the growth of its merchant through various ways:

  • a wide range of payment methods accepted
  • quick plug and play scalability in new countries
  • user-centric checkout solutions to improve merchant conversion rates
  • fraud prevention

Financials analysis

Income statement

Over the last 3 years Adyen saw a sustained growth, with its total payment volume growing 1.5x from from 2017 to 2019 that directly transacted into a 2.5x growth of the net revenues.

Adyen total payment volume and net revenues

Their revenue model is based on four elements:

  • Settlement fee: % of the value for acquiring services (to be netted of interchange fees)
  • Processing fee: fixed fees (10 € cents) paid when a transaction is initiated via the Adyen payment platform
  • Sales of POS (Point of Sales)
  • Other services: exchange service fees, 3rd party commision

From a gross revenue perspective, the settlement pillar appears as the dominant component of their business, with a contribution of more than 85% to the total revenues.

Adyen revenues split

Anyhoo, the situation looks different when we consider the net revenues component.

Adyen revenues split with common size analysis over net revenues

In reality, considering their holistic approach to payments, it is obvious how each component of their product self reinforce the others: they offer a single package which aims at solving every problem of the payment cycle and each business line should be analysed with these lenses – losing a few millions on the POS business is a no brainer, when this will lock in the merchant and guarantee extra Billions of € of transactions on the platform.

Adyen income statement with common size analysis (over net revenues)

Overall, they show a pretty solid growth of revenues and a very strong operating margin (over net revenues), which sits around 51%. This is a very healthy margin, especially when compared to other competitors in the space.

Main payment providers operating margin

Adyen’s growth over the last years has been impressive, but this must be contextualized in a favorable trend for the entire payment industry. The revenues of the global industry more than doubled in the last decade and the expectation, based on McKinsey Global Payment Report, is that they will grow even further in the next 3 years.

In this already positive wider environment, Adyen benefitted even more from the shift away from cash towards electronic payments – with a total number of non-cash transactions almost doubling in the last 5 years.

Balance sheet

The biggest insight deducible from the BS is that, not surprisingly, payments is such a liquid business! 67% of Adyen assets are in cash or cash equivalents, and 19% are Receivables for a total 86% of current assets.

Adyen balance sheet with common size analysis

Looking at the common size analysis, the sheet shows a strong continuity with the previous year. Most of the items didn’t significantly change from 2018, with a clear organic expansion of the BS.

Statement of Cash Flows

The SCF is in line with the growth story told by the Income Statement and Balance Sheet. Adyen presents a positive operating cash flow which grew steadily in parallel with the net profit, with minimal net financing and investing flows.

If we abstract that trend and represent it in the typical cash flow curve, we identify a company in its late growth/maturity phase: a company which is producing strong operating cash flow, it’s not highly negative on investing anymore but it is also not distributing back to investors yet.

Looking ahead

Adyen’s financials describe a company in great shape and ready to scale its business further very quickly. Even though it is playing in a crowded industry, the Dutch company is in perfect position to become the go-to payment platform in particular for enterprise customers who want a modern, digital-first payment infrastructure – less so for SMEs who would probably look at more self-serve platforms like Stripe.

The recent pandemic will probably only accelerate their growth, due to the obvious shift to digital products of many users, a segment where Adyen is much better positioned than many incumbents in the space.

Overall, Adyen is definitely a solid company with a very scalable business model and a promising future.


Resources

Adyen:

Payment industry maps:

Pricing: