To be honest, most investors Shopify (NYSE:Shop) Think about how much stock prices have risen in the past. The company went public less than a decade before he did, and he's already seen it rise nearly 3,000%. For perspective, his $1,000 invested when Shopify stock went public would be worth more than $30,000 to him today.
For some investors, Shopify is just a stock ticker. But rather than just paying attention to ticker movements, it's important to understand what the stock's underlying business is doing.
Here's one small part of Shopify's business that can have a big impact on your bottom line.
How Shopify does business
Shopify is an e-commerce software company. But it's hard to concisely describe Shopify's business because there's so much going on. This includes the expected things like registering a domain name and building a website. But it also contains some surprising content. For example, the company has an app store and you can earn advertising revenue by promoting your app.
Shopify businesses can be divided into two broad categories: those you need to build an online presence, and those that help you handle transactions from start to finish. These spiritual categories roughly correspond to the company's two business segments: Subscriptions and Merchant Services.
With subscriptions, Shopify makes money by selling subscriptions to its platform (of course), but it also makes money from other things, like the aforementioned domain registrations. In merchant services, the company makes money by processing payments, providing shipping labels, and more.
In 2023, Shopify's gross merchandise value (the dollar amount of sales on the platform) was $236 billion and gross payment value (the amount of payments processed) was $137 billion. These numbers are huge, and of course the small fees charged on these transactions quickly add up to big numbers for Shopify.
Therefore, merchant services is Shopify's larger business segment, accounting for 74% of its revenue in 2023. However, this segment is not as profitable as subscription.
In fact, Shopify's subscription services revenue achieved a gross margin of 81% in 2023. This part of the business is also growing rapidly, with revenue growth of 23% last year.
What should investors do with this knowledge?
Understanding how businesses work is an important part of building an investment theory, an explanation of why stock prices rise. In Shopify's case, it looks like a high-margin business growing at a faster pace is a good thing. But there are nuances here that need to be understood.
Shopify increased subscription prices in 2023. Price changes varied by level. However, the smallest increase was 25%. Given this context, the company's 23% growth in subscriptions doesn't seem exciting.
Subscription revenue is highly profitable, so Shopify shareholders want this revenue stream to grow. But a better way to grow is to acquire new subscribers instead of charging existing subscribers extra. Unfortunately, the company does not provide subscription numbers to investors. However, it appears that the growth in 2023 was not that large. Most of the growth appears to be due to charging higher prices.
This is something investors should keep an eye on for Shopify stock in 2024. The company is growing subscription revenue, which is very important. But the company is growing by acquiring new subscribers, and it's unclear whether that is sustainable.
If Shopify's subscription revenue continues to grow in 2024, that would be a great signal that new subscribers are paying for the service, potentially leading to market-beating growth for the company.
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John Quast has no position in any stocks mentioned. The Motley Fool owns a position in and recommends Shopify. The Motley Fool has a disclosure policy.
1 Shopify's portion of the business brings in 26% of its revenue, but also 42% of its profits. What Investors Need to Know was originally published by The Motley Fool.
