In April 2022, Amazon (AMZN +1.00%) introduced a product called Buy with Prime. Prime, of course, is the e-commerce giant's membership program. One of its perks is free and fast shipping with a reliable delivery estimate. Buy with Prime allows third-party e-commerce companies to offer these same delivery perks to their customers.
When it started, Amazon's Buy with Prime was by invitation only. But as of January, it's open to anyone who wants to use it. For some analysts, this is a problem for e-commerce platform company Shopify (SHOP 4.14%). For example, UBS analyst Kunal Madhukar says that up to 14% of Shopify's revenue is possibly at risk due to Buy with Prime adoption trends, according to The Fly.
With so much apparently at stake, it might seem strange that Shopify is in talks to partner with Amazon on Buy with Prime. But that's exactly what's happening right now. Here's why.
NASDAQ: SHOP
Key Data Points
Amazon and Shopify: Frenemies?
In the conference call to discuss financial results for the fourth quarter of 2022, Shopify president Harley Finkelstein said, "When it comes to Buy with Prime, we think any company that's going to make their infrastructure available to merchants to sell more [is] a great thing." So Shopify is talking with Amazon about how to partner on the service. According to Finkelstein, the discussion is how to get any potential sales data from Amazon over onto the Shopify platform, so that Shopify’s merchants can continue monitoring everything in one place.
Speaking at the Morgan Stanley Technology Media and Telecom Conference, Finkelstein said: "I'm optimistic we'll get there with Amazon. We have a good history and a good relationship with them."
However, according to Madhukar, Buy with Prime is a threat to up to 14% of Shopify's revenue. Considering the company generated $5.6 billion in revenue in 2022, this could be a roughly $800 million problem. So why is Shopify building bridges to its castle instead of digging moats around it?
Simply put, Finkelstein apparently disagrees with the analyst community regarding the competitive nature of Buy with Prime. As Finkelstein said: "Is it competitive? No. It's one more way that a consumer might be able to check out." Making things easier for customers can lead to more sales for merchants, and that's what Shopify should care about.
Shopify's history supports an optimistic perspective
Shopify faced similar scrutiny in 2018 when it decided to accept Venmo, owned by PayPal Holdings, at checkout. Venmo directly competes with the company's own product, Shopify Payments. Therefore, on the surface, it doesn't make sense to allow Venmo as an option.
If we dig a little deeper, however, it makes complete sense. Building business is about giving shoppers and merchants as many options as possible to drive market share and volume. And striving to partner with megaplayers like PayPal and Amazon is likely a big reason Shopify's volume is soaring. Consider that in 2018, the year it added Venmo, its gross merchandise volume was just $41 billion. In 2022, it was $197 billion -- up nearly fivefold in just four years.
Venmo isn't the only reason gross merchandise volume has nearly quintupled for Shopify. But expanding options for users is likely a big reason for the gains.
Moreover, integrating with Venmo didn't stop progress for Shopify Payments. In 2018, Shopify Payments handled 41% of the merchandise volume on the platform. In 2022, that proportion jumped to 54%.
In short, gross payment volume for Shopify Payments has -- counterintuitively -- grown faster than gross merchandise volume since Shopify opened its platform up to Venmo. Management believes it could achieve similar success by incorporating Buy with Prime.
Trading at a high price-to-sales valuation of about 10, Shopify stock carries some valuation risk. And management is forecasting one of the company's slowest growth rates ever. Therefore, I can appreciate some concern regarding what Buy with Prime could do for Shopify's growth, because the risk is that more payment volume and shipping volume will flow through Amazon instead of Shopify.
However, according to Amazon, merchants that use Buy with Prime see a 25% average increase in shopper conversions (purchases), which could actually be a benefit for Shopify's customers. And if it's good for customers, it's the right move for Shopify.
To be sure, a Shopify-Amazon partnership is complicated, and only time will tell how it will play out in real life. But it might not be the problem that some believe it to be, and that should be comforting for shareholders.
