Comment by justin_vanw | Hacker News Reader

Comment by justin_vanw | Hacker News Reader

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Hey, you're right!

https://www.google.com/finance?q=NYSE%3ASHOP&fstype=ii&ei=IE...

Revenue growth with corresponding increases in costs and expenses. NOT getting closer to profitability, in fact operating losses are increasing in proportion to revenue (almost a linear relationship in every quarter and year in the reports).

Again, this is a failing business. 12 years in and no profit, profit not within reach, costs growing in lockstep with revenues.

EDIT:

So I was curious how they had such high revenues when clearly subscription fees can't account for it. Found this in the financial statement:

"We principally generate merchant solutions revenues from payment processing fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards online and offline. As a result of the launch of Shopify Payments in August 2013, we have seen significant growth in the revenues generated from our merchant solutions. In addition to payment processing fees from Shopify Payments, we also generate merchant solutions revenue from transaction fees, Shopify Shipping, Shopify Capital, referral fees from partners, and sales of point-of-sale ("POS") hardware. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Merchant solutions revenues increased from $34.5 million in the six months ended June 30, 2015 , to $77.0 million in the six months ended June 30, 2016 , representing an increase of 123.4%"

So they are counting CC processing fees towards revenues. I suspect that CC payment processing fees shopify pays are approximately equal to what they are charging, so this is just a revenue game where they charge 3% to customers, pay almost 3% to the CC companies, and book revenue that can never be profitable.

EDIT2: So found the cashflow in the statement. They charged $76M for these fees, and paid out $56M. Not bad actually! However, that $20M in net is still much lower than the costs to generate the business, $56M just in marketing.

> So they are counting CC processing fees towards revenues. I suspect that CC payment processing fees shopify pays are approximately equal to what they are charging, so this is just a revenue game where they charge 3% to customers, pay almost 3% to the CC companies, and book revenue that can never be profitable.

You don't understand the meaning of the word revenue.

Maybe, I think I know what it means but I'm not an accountant.

I know that revenue is often quoted as some kind of measure of the success of a business, when in reality it's extremely easy to run up revenues if you are running at a loss. In the most trivial case, you can pay $1.10 for $1 bills, for example.

Ok, so shopify isn't doing that, but it's hardly different, just a more complex situation. They pay $50 for advertising to get $75 in revenue, which they immediately pay $55 for. That's $105 paid out to buy $75 in revenue.

It would certainly be cheaper to just pay $1.10 for each $1 in revenue. I'm sure the folks at shopify don't think of it this way, and I'm sure they genuinely believe that they will someday change the economics of this and become profitable. However, the balance sheet doesn't support that belief, for me at least, and it sure looks like every customer they maintain leads to more money they are losing.

Perhaps they can become profitable with enough economies of scale. Again, I would question how much larger they would have to get to hit the inflection point, which they haven't done, at least in the financials reported, so far losses are scaling up linearly with revenues (which is to say operating margins are a steady negative % against increasing revenues).

Since they have been around for a long time (12 years) and those same 12 years have seen an absolutely huge increase in ecommerce, it seems like they have failed to hit the required scale despite the most favorable conditions you might hope for. That doesn't make me very optimistic.

Assuming you based this off their financial statements, then everything you are saying is pretty much 100% on the ball with regard to interpreting their cash flow.

> That doesn't make me very optimistic.

I would say that the market is "on your side" at least for now, as people on here have been starting to compare them to Amazon which is, in terms of market cap, 100x higher valued than Shopify and really not a fair comparison. However, let's not forget that the reason Shopify is a 3.5bil company (and not worth say "only" 500mil) is because they have eyeballs on them right now, and quite a few at that. The market isn't sure how they plan to use those eyeballs, but there's enough visibility to give them a chance at being a strong market player in the future. Also yes, despite being publicly traded, most investors would consider them still to be startup based on where they are at with their business model.

I think they're required to do it that way if they're preparing their financial statements in accordance with IFRS or U.S. GAAP.

In the case of processing fees, I'd expect those to be what makes up most of the 'Cost of Revenue' line on the statement. In a company selling physical goods, it would be called 'Cost of Good Sold'. Basically, the cost of the raw materials you had to acquire to build your products. Because of this, they tend to scale in proportion with revenue, and it looks like this is the case for Shopify. Their cost of revenue is a little under 50% of revenue, so I don't think it's fair to say their revenue can never be profitable.

In terms of profitability, their net loss isn't that big as a percentage of revenue. They could probably, if they wanted to, let revenue grow for a while without increasing staffing levels or advertising spend too much - it wouldn't take long for them to be profitable. But if you've got enough cash on hand to run a relatively small loss in order to continue growing, solidify your position in the market, and expand into new markets (like they've been doing recently with Shopify POS) it makes sense to do so. They have

Right now, they have $409.39 in cash and short term investments. That money isn't going to help you much just sitting in the bank, and using it to grow the company will probably result in a significantly higher ROI than other things they could invest the money in. The way it looks to me, they're not running a loss because they have to. It looks like they've made a conscious decision to do so, and it looks like that decision is a good one based on the company's financial position.

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