Since going public in 2015, Shopify Inc. (SHOP, Financial) has been one of the best-performing stocks on the market. While it falls in the category of e-commerce companies, this game-changing platform has revolutionized the way startups sell their products online.
It has made it easy for small players to find potential buyers from platforms such as Facebook (FB, Financial) by leveraging on Shopify’s infrastructure. How many times have you come across an advertisement on Facebook with those countdown discounts? It is hard to imagine an instance where a Facebook user logs on to their profile and fails to see a single ad running on Shopify’s framework.
Before Shopify, it was imperative that a company looking to sell products online created an e-commerce website, which it could then use to reach out to potential customers on various social media platforms, including Facebook, Twitter (TWTR, Financial) and Pinterest.
A lot has changed since then. Shopify now allows businesses to sell their products via its platform by giving them a subdomain. Given the company’s reputation, some buyers do not mind using the subdomain, which represents the actual merchant. They draw confidence in the security of their activity from Shopify’s reputation. So if the deal looks right, chances are security issues will not be an obstacle.
Why Shopify’s run could be halted
Shopify is likely to benefit more if all of its users did not have their own private websites. That would imply a strong customer retention level. According to OWDT, an e-commerce platform developer based in Houston, having a private e-commerce website is still very crucial for any business looking to grow exponentially.
Shopify and other networks that allow product listings can act as useful anchors for a business’ main e-commerce platform. In other words, OWDT believes business owners should look at these platforms as complementary selling channels rather than the primary streams.
This is what many niche e-commerce platforms are doing. For instance, a business specializing in skincare and beauty products would benefit more if it manages to redirect some of the traffic it receives from Shopify to its platform.
The concept here is you are more likely to develop customer loyalty when customers are buying or are at least able to find your platform rather than the Shopify subdomain.
A good example is this Bikerringshop e-commerce platform, which sells jewelry to bikers. When looking at products listed on the website, it is obvious some of them have appeared on people’s Facebook feeds via Shopify or some other form of advertising.
There is a chance there are multiple people selling the same products, however. In fact, after performing a simple Facebook search, my speculation proved to be correct.
This means if the biker jewelry shop sold a few skull rings on Facebook via Shopify, it is not a guarantee that when the same customers returned for more products, they would be automatically redirected to the skull rings page at the biker jewelry shop. They could come across an interesting offer from another merchant, which would then capture their attention.
Just as OWDT notes, in the case where an e-commerce merchant has their own website—where they can refer customers—the chances of a customer visiting the platform directly the next time are increased. This is also why identifying a niche market is key in the modern e-commerce marketplace.
If more Shopify merchants were to embrace this model, they could build up customer loyalty and customers would visit the merchant's website directly.
What does future hold for Shopify?
While Shopify has more social aspects than Amazon (AMZN, Financial), the business model appears to be closely related. One of the few differences is Amazon has grown over the years to make and sell its own products. That is a step Shopify could be looking at soon, unless it wants to remain an underdog in this lucrative market like eBay (EBAY, Financial).
Before the most recent plunge in technology stocks, Shopify had gained 230% over the last twelve months. It rallied from about $30 per share in June of last year to about $99 per share on June 8. In general, the stock is now up nearly 245% since its first day of trading on May 21, 2015 (closed at $25.86) while the initial public offering investors are currently enjoying a massive 423% gain on their $17 per share investment.
The downside is the recent history of tech IPOs is not all that favorable. Some have made massive gains before plunging to trade below their IPO prices. Some good examples being Twitter, Facebook, Groupon Inc. (GRPN, Financial) and Zynga Inc. (ZNGA, Financial).
Therefore, it remains to be seen what the future holds for Shopify. Will its current crop of online merchants steal all its customers? Or will Shopify continue to attract more merchants? These questions are worthy of a lengthy debate for several months to come.
Disclosure: I have no position in any stock mentioned in this article.
