2015 22 25.4 29.4 36.5
2016 40.1 47.5 53.8 68.1
Cost of subscription solutions 10.1%
Cost of merchant solutions 36.1%
Cost of revenue: 46.2%
Shopify had a faster growth in merchant solutions vs subscription solutions last year, hence gross profit being slightly lower % of total revenue (55% vs 53%).
So why are they losing money? Operating expenses keep rising.
Sales and marketing was a whooping 129 mil in 2016.
Quote from their annual report:
Sales and marketing expenses increased $58.8 million , or 83.6% , for the year ended December 31, 2016 compared to the same period in 2015 , primarily due to
an increase of $29.4 million in marketing programs, such as advertisements on search engines and social media, to support the growth of our business. We believe
the strong investment we are making in external marketing programs and internal ones, such as Shopify Unite, the Company’s annual Partner and Developer
conference, our Build a Business competition, our retail tours, and the Shopify Blog, continue to be effective in growing the number of merchants using our
platform. During the year ended December 31, 2016 the total number of merchants increased 62.5% to more than 377,500 . In addition to external marketing
spending, employee-related costs, including facilities expense, increased by $26.0 million in the year ended December 31, 2016 , primarily resulting from total
sales and marketing headcount growth of 91%…
Sales and marketing expenses as a percentage of revenue have decreased year
over year as revenue from merchant solutions generally requires significantly less marketing expense than Shopify’s core subscription business.
R&D increased 34 mil and General Admin increased 22mil, primarily due to employment costs.
Let’s assume G&A will continue to increase at the same rate as revenue increases, and keep R&D at 20% of revenue (although this is coming down). It is a tech company after-all, so to maintain its advantage and to continue growth it needs to invest in R&D.
So a large amount of leverage could come from Sales and Marketing. At a cost of 129 million in 2016, if we removed it completely we’d have got a net profit of 95million in 2016.
That gives us a nice P/E of almost 100
% cost of revenue
TL:DR What Ant said.
None of this is looking at SBC. We’re all putting our hands together and praying that Tobi can increase revenue massively and start leveraging and creating value. In the meantime we hope SBC isn’t destroying long-term value for us.