3 Risks To Consider Before Investing In Shopify

Shopify (NYSE: SHOP) is an all-in-one platform that allows small and medium-sized businesses to create and operate an e-commerce store with ease. With the rapid expansion of e-commerce in recent months due to the coronavirus and Shopify's incredible run this year, there is a lot to like about the company. However, there are still some significant growth risks to consider:

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1. New market entrants

With more and more retailers placing a heavier emphasis on e-commerce offerings, many new competitors to Shopify have been entering the market. The likes of WooCommerce and Squarespace are already major competitors for the creation of e-commerce platforms. For fulfillment services, Amazon (NASDAQ: AMZN) currently wears the crown. Square (NYSE: SQ) launched a similar offering in 2019, working with United Parcel Service (NYSE: UPS) as its fulfillment service. MercadoLibre (NASDAQ: MELI) has also gained a strong foothold in Latin America, making an entrance into that market very difficult.

Big companies such as PayPal (NASDAQ: PYPL) and Google (NASDAQ: GOOGL) may also look to compete with Shopify down the line, further diluting the market. While these entrants would not spell the end for Shopify, it certainly would have a negative effect on its share price if these offerings were a success. We also know that Facebook (NASDAQ: FB) has joined the e-commerce money train with its Facebook Shops feature.

2. Growth costs

Since Shopify's IPO in 2015, its average annual revenue growth has been more than 70%. It now has more than one million customers using its platform. Over time, with revenues increasing, it becomes harder to sustain this rate of growth. The company also is still not profitable, generating a net loss of $125 million in 2019. 

To continue its impressive growth rates, Shopify will have to spend to reach new markets and to provide a more efficient offering. It has now started the Shopify Fulfillment Network that will see the company storing inventory at designated warehouses, allowing merchants to reduce their shipping times. 

With a lot of merchants using suppliers in the Far East, this has been the main source of delays for customers receiving their products. This new fulfillment network will require an investment of $1 billion over the course of five years. However, the company is still not profitable despite an uptick in business since March, so investors will be anxious to hear its Q2 earnings report sometime this month.

3. Potentially exposed target market

The main focus of Shopify is small and medium-sized businesses. The e-commerce platform allows these business owners to set up an e-commerce store with little or no technical or coding knowledge needed. Everything is taken care of for these business owners, allowing them to focus on other parts of their business. However, when there is economic uncertainty, it is small and medium-sized businesses that tend to suffer the most. 

The global economic outlook now looks very hazy, and we know a lot of damage has been done. Many business owners have had to shut their operations as they can't keep up with mounting costs, decreasing consumer spending, or debt obligations. Shopify has been around during a period of economic success, but with the tables now turned and revenues potentially drying up for its customers as further lockdowns seem more and more likely, Shopify will need to adapt and find other ways to generate revenue to make up for any shortfall.

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