Facebook’s New Shop Feature Is Very Bad News For Shopify – Seeking AlphaeCommerce
With Facebook Inc, (FB) rolling out its Shop feature other eCommerce platforms are under threat. I believe Shopify Inc (SHOP) is set to suffer the most as e-commerce becomes increasingly concentrated on social media platforms and (AMZN). Shopify is trapped in between these two giants which are slowly squeezing away at SHOP’s value proposition.
It’s finally here
On Tuesday, May 19th Facebook announced the much-anticipated . This feature will be available for both the Instagram and Facebook platforms. Shops will allow users to display their products in a virtual “storefront” with most of the typical eCommerce features. One important detail is that checkout is so far only available for the U.S. Businesses and merchants operating in other markets would have to redirect users to their website or another third-party.
In Facebook’s press release the company mentions it will be looking at strengthening its collaboration with other eCommerce platforms such as BigCommerce and Shopify Inc (SHOP). While collaborating will certainly be beneficial for both parties one must wonder if simply being another player in the eCommerce space will be enough to satisfy Facebook’s ambitious goals.
Shopify vs Facebook Shop
There is no doubt that, as of writing this, Shopify is one of the most “successful” eCommerce platforms out there. The company evokes fanatism in both investors and users. But how will Facebook Shop affect Shopify’s growth prospects? To answer this question, we must dive into the specifics of the products.
First, and perhaps most importantly, let’s talk about fees. Shopify has leveled monthly payment plans starting at $29 and getting as expensive as $2000 for Shopify Plus. On top of that, Shopify also charges transaction fees ranging from 2-0%. Shopify will reward you with 0% transaction fees if you use their payment getaway. I covered Shopify more in-depth in this article. As far as I’ve gathered, the Facebook shop is free to use, but the company will charge a flat 5% sales fee.
In terms of ease of use, both are incredibly newbie-friendly. While Shopify also offers some valuable solutions to big enterprises Facebook Shop, so far, seems to be geared towards small businesses and merchants. Both platforms are easy enough to set up and no programming or design skill is needed. In both instances, you create the main page, upload your products with all the relevant info, and you are ready to sell. While the main setup is simple and perhaps even easier on Facebook, (you don’t even need a domain) Shopify certainly offers far more in terms of webpage design and back-end management.
Shopify is built as a one-stop-shop for businesses and entrepreneurs looking to sell their products online. In this regard, the company is unmatched in terms of flexibility and features. There’s no real limit to what one can do on Shopify’s platform, especially if you are ready to pay for Shopify Plus.
There is however one area where Facebook has Shopify beat and that is its reach. With over 2.5 billion users the platform certainly has a lot more organic traffic that Shop owners can leverage. And of course, having your shop on Facebook’s platform should also improve the effectiveness of Facebook and Instagram ads since the data is all in one place.
Who will win this race?
So far, it’s true that Facebook Shops can be seen as a complement to Shopify. Some people even view this as a strength for Shopify, but I am not as optimistic. Facebook Shops is only the beginning and the tech giant won’t stop until it has pushed Shopify and the rest of the players out. As far as I see it, Shopify is caught between a rock and a hard place, and here’s why: The two main components of eCommerce are traffic and sales. In both these areas, Shopify will be crushed.
As far as sales go, Amazon is dominating the market without a question:
Source: Shopify Investor Presentation
Funnily enough, Shopify boasts that it holds a strong position in the domestic eCommerce market. Granted, the company appears to be the second-largest platform, but it only has 5.9% vs Amazon’s 37.30%. Both through figures and merchants’ accounts, Amazon is where sales are being made. Amazon has become a giant marketplace and a worldwide fulfillment service that everyone can trust and no one can match.
On the other hand, we have traffic and we all know where this comes from; Search engines, ads, and social media. In this regard, Instagram and Facebook Ads are without a doubt the best tool for online marketing. Anyone who is making sales on Shopify is using ads or at the very least is using social media to market their products. With most traffic coming from these platforms, it is only a matter of time before the shopping experience becomes fully and seamlessly integrated into the platform.
Where does this leave Shopify? Hanging in limbo, with people going from Instagram/Facebook to Amazon and increasingly bypassing other parties and websites. In this scenario, all Shopify has to offer is a place where you can aggregate and run your day-to-day. However, as a CRM and ERP Shopify’s platform has significant limitations. While one can indeed achieve extra functionalities through Shopify Apps, the company has to compete in this area with much better and established players such as Inc (CRM) and SAP SE (SAP).
Shopify’s appeal is that it can somehow aggregate all these functionalities into one place. The omnichannel feature is perhaps one of its biggest appeals since it allows you to monitor sales on different platforms, including Facebook and Amazon, from one place. But as the shopping experience becomes more and more concentrated into these giants one has to wonder how much more value Shopify can add.
Finally, it would be incredibly easy for Facebook and Amazon to simply push Shopify out by not allowing integration or not allowing people to link their ads to a Shopify store. While I think it is unlikely to happen the idea serves to highlight Shopify’s position of weakness versus its more evolved competitors.
Let’s put this into numbers. Shopify has a market cap of $86.85 billion, while Facebook’s is $657 billion. As far as users go, it had 1 million merchants on its platforms and $135 billion in yearly sales. Compare this to Facebook’s 2.5 billion Monthly Active Users and Amazon’s $335 billion in yearly sales. In both instances, Shopify is dwarfed by these companies. Worse than that, is the fact that most of the sales in Shopify are already coming from social media and Instagram/Facebook ads.
Shopify carries with it a ludicrous valuation, trading at around 1333 Non-GAAP (FWD) and the only reason it can sustain this valuation is that people expect the company to dominate eCommerce. But with Facebook now entering the space it won’t take long for Shopify’s growth to slow and when this happens the price will come crashing down to reality. I have valued both Shopify and Facebook in other articles using DCF valuation and Shopify is priced for huge success. Anything less than this will take many Shopify investors by surprise and I just can’t see how Shopify can keep growing while Facebook and Amazon are in the market.
For this reason, I remain bullish on Facebook. The Shop feature and this could be dwarfed by WhatsApp’s monetization. On the other hand, I’d be surprised if Shopify can maintain its current levels of growth, and profitability is still an issue which the company has to figure out. This could lead to both share dilution and lower valuation ratios moving forward. As of right now, Shopify has a lot more downside than upside potential. Currently, I believe Facebook is heading to $290 while Shopify will more likely revisit the $500 area.
Shopify can certainly be a useful tool but as a company, its ambition will be its downfall. Shopify hopes to be the next Amazon and I simply don’t see this happening. It faces too much competition from players with deeper pockets and larger audiences. Facebook Shop and Facebook Ads, on the other hand, can serve as a complement to Amazon’s platform, which is why I see this as an incredibly positive development for Facebook, but bad news for the already overvalued Shopify.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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