Canadian e-commerce giant Shopify made its stock market debut in late May to great excitement, with an IPO of over a $1 billion, and the buzz has yet to wind down. However, market experts recommend approaching this opening with caution, drawing comparisons with the recent post-IPO drop in Etsy’s stock price as well as Etsy’s recent legal troubles. Even as Shopify continues to trade at $35 and above, an Etsy-style price drop could still be in the company’s future.
A Powerhouse IPO
With an initial stock price of $17, according to Fortune, Shopify arrived on the New York and Toronto Stock Exchanges to a level of interest not quite equal in measure to the common knowledge about the company. Shopify is a software as a service (SaaS) company that provides the structural support for online storefronts. This sets it apart from competitor company Etsy, which is itself a portal site that houses small shops. In comparison, Shopify’s model is much more independent and allows for greater merchant flexibility.
Part of what makes Shopify so appealing is precisely the independent structure that the business fosters. Etsy can only draw consumers based on what is sold by people who run shops; the company makes its money through payment processing and the like. Shopify, on the other hand, makes money through subscriptions to its software. At the end of the day, it doesn’t matter what merchants are selling out of their Shopify shops; it just matters that those shops exist. This factor alone is enough to make Shopify seem like a better business bet than Etsy.
Etsy’s Investor Fallout
Shopify headed to the market floor in what can only be seen as a direct response to Etsy’s own successful IPO. Unfortunately, things haven’t stayed quite as successful for Etsy. As recently publicized, investors are currently suing Etsy for making what have been categorized as misleading statements. Essentially, what this boils down to is that Etsy investors discovered, after buying in, that over 5% of the products sold on Etsy are counterfeits or otherwise constitute trademark and copyright infringement. This is a big problem for Etsy and its investors alike.
The full ramifications of this legal tangle are not likely to be known until after the July 13th investor deadline for action. As of right now, what options are available to Etsy investors have not been made public.
This situation clearly has not had beneficial effects for a company that was already struggling after taking larger than expected losses during their first quarter, according to Maureen Farrell at the Wall Street Journal. Further, these two issues combined have raised the hackles of Shopify investors and market watchers who’re concerned that Shopify may suffer the same fate.
What The Future Holds For Shopify
There are mixed predictions about what the post-IPO period holds for Shopify, but Lior Ronen of Amigobulls suggests proceeding with caution. While Ronen does acknowledge that Shopify has shown remarkable growth recently, that’s no guarantee of ongoing success; there may be a market wall in their future.
It’s also too early to tell whether Shopify will undergo a correction that suggests that their $17 IPO pricing was too high. This, says Ronen, was the case with Etsy, and the price drop seen in that case is simply a rebalancing that’s bringing the stock into closer alignment with the actual company value.
Ultimately, Shopify has better prospects than Etsy, as they’re highly unlikely to become embroiled in a legal case with their investors. However, Shopify remains in a “wait and see” period. The stock has doubled its IPO price since hitting the market, and many question whether this increase is realistic. At this juncture, the stock’s movement may be outpacing the company’s value.