What is the Next Big Growth Wave for Shopify?

A lot of people, including myself, think that Shopify may be the next “Amazon”-level investment. It’s already had a huge run-up — it’s a $75 billion company — but it seems almost inevitable that it’s going to be one of the next companies to join the trillion dollar valuation club. That would make it well over a 10x from here.

The team is clearly really talented. I have a lot of trust in their CEO, Tobias Lütke. But it’s not clear exactly where the next big growth wave will come from.

For Amazon, it was AWS. They completely revolutionized the internet and capitalized on the shift to cloud software.

For Nvidia, it was AI. Every company that wants to be a serious AI player needs to pay Nvidia billions of dollars.

What are the possibilities for Shopify?

Web 3.0

Shopify has started integrating blockchain technologies and cryptocurrencies into its offerings, allowing merchants to accept payments in various digital currencies, which not only diversifies payment methods but also taps into a more technology-focused consumer base.

They’ve also launched a series of initiatives to support the sale of non-fungible tokens (NFTs), providing tools for creators and merchants to mint and sell NFTs directly from their stores.

While these initiatives are exciting and innovative, it’s not clear that this will be a lasting advantage. Even if Shopify were at the center of the money flow in the crypto trend, like Coinbase or Nvidia, this would be extremely cyclical.

But they are not at the center of the money flow. They are on the periphery. Sure, they have the potential to build something cool, but I have not seen evidence of a new trend that makes Shopify a go-to crypto platform in a big way.

Advertising

The introduction of Shopify Audiences aims to help merchants find likely buyers by using machine learning algorithms that analyze purchase intent data across the Shopify platform. Perhaps this could revolutionize how merchants approach advertising by providing them with a powerful resource to increase conversion rates without needing to invest heavily in third-party data analysis tools. Could this make Shopify more competitive with Meta?

From their President, Harley Finkelstein, on their most recent earnings call:

Let me also talk quickly about audiences because I think it's important … It's now helping merchants get better results from the digital ads. The algorithms that this thing is getting better at every day helps with finding high-intent customers. And in some cases, we are leading -- we are seeing this lead up to 50% CAC improvements. So it is really important. It's also a key reason why merchants used to upgrade to Plus. We're now experimenting more. We just launched a free 45-day trial in April. Some merchants who are not on Shopify Plus can actually experiment with it. Of course, the goal is to get them the upgrade, but also get them to start using it. …The audiences product is something that we're really proud of. And I think you'll see us continue to double down on it. But advertising in general, I think what differentiates Shopify is our ability to interpret data, experiment and then lean into where we see these opportunities.

This is all fine and good, but to me it doesn’t feel revolutionary. It’s extracting incremental value from their existing customer base and market — it’s not a brand new trend that’s going to spur exponential growth.

Payment and Financial Services

Shopify has already seen significant benefit from the introduction of Shopify payments, which saves customer payment information so they can spend at any Shopify store seamlessly.

Shopify has the potential to expand even further into payments, putting it in the same territory as Stripe, Paypal, Block and the like. In fact, they do have a product called Shopify Balance, a free business financial account built directly into the Shopify admin.

While this is a convenient addition for existing sellers, it does not appear to have a huge effect on Shopify’s revenue, and is not enticing enough to attract users just for the business account benefits. Again, not revolutionary.

Consumer Platform

Perhaps Shopify is uniquely positioned to transform from a service provider to a destination site through its consumer-focused initiative, shop.app. This app aggregates all Shopify-powered stores into a single consumer-facing marketplace, allowing users to browse and shop across a diverse array of products and stores in one unified interface.

By leveraging its extensive merchant network, Shopify can offer personalized shopping experiences, recommendations, and exclusive deals, directly competing with larger retail platforms like Amazon and eBay. It also serves as a loyalty and rewards hub, encouraging repeat purchases and increasing customer retention rates by offering rewards that are redeemable across the Shopify ecosystem.

These features make shop.app a central piece in Shopify's future strategy. But it doesn’t seem to be catching on. It’s fun to play around with the search, but they do not have product market fit here. Amazon is still the king of being the everything store.

The mission is clear, but the vision and strategy are not

The good news for Shopify is that they have a clear mission, and one that I love: reducing the barriers to business ownership to make commerce better for everyone.

The default vision for this is that they will continue to capture more and more of the global e-commerce market, which is projected to be almost $8 trillion by 2027, in addition to improving their operational excellence to extract more value from that market.

But the problem is that doesn’t seem to give Shopify a thrilling story from here. There doesn’t appear to be a brand new industry on the horizon, like there was cloud software for Amazon, generative AI for Nvidia, or like humanoid robots or robotaxis could possibly propel Tesla in the future.

The pandemic teased us a bit — in many ways it accelerated Shopify’s vision for a future where all businesses are online by default — but now we’re back to the normal rate of growth.

Perhaps the right analogy here is Meta, whose advertising business is boring but solid, and has propelled it into the trillion dollar club. But even there, I appreciate Zuckerburg’s ambitious vision for being ahead of the curve on the next computing platform. They are also very directly contributing to the AI space in a way that will both bolster their core business and open them up to new generational opportunities.