With its recent string of costly acquisitions, stock-market darling Lightspeed Commerce Inc. is beginning to look like e-commerce giant Shopify Inc.’s Mini-Me.
So much so, in fact, that it risks becoming a takeover target for Shopify.
That might even be the unacknowledged plan of Lightspeed CEO Dax Dasilva, despite the pride he can take in being one of North America’s leading consolidators in the red-hot e-commerce sector.
But that kind of pride has its limits in the tech sector. In a tradition as old as Silicon Valley, small-fry players like Lightspeed grow quickly only to be gobbled up by a bigger player.
For all their rapid growth, the takeover targets don’t have the resources to make the next big leap to major player. Their founders cash in, using the proceeds to start over with a new business.
A classic example is Elon Musk, who used his windfall profits from the sale of PayPal Holdings Inc. to launch Tesla Inc.
The dominant player in Lightspeed’s e-commerce sector is Ottawa-based Shopify, which boasts $ 3.6 billion in annual revenues and more than 17 million merchants running online stores on Shopify’s platform.
The eventual pairing of Shopify and Lightspeed is such a predictable outcome that it should be a selling point for securities analysts who like both firms.
So far, though, the Street believes that each company has such tremendous growth potential that there’s ample room for both of them in e-commerce.
Apart from their difference in size, there are striking similarities between the two companies. Each is a leading provider of tools used by online merchants across North America to run online stores. And each is in a race to develop an ever-wider selection of those tools to attract merchants to its platform.
Both companies were also among the pandemic-economy winners. Revenues at each firm almost doubled last year, and the value of Lightspeed shares has almost tripled in the past year, to a current $ 119, while shares of Shopify gained about 40 per cent in that period, and as of Wednesday noon traded at $ 1,894.
Montreal-based Lightspeed has been so aggressive in diversifying its client services that Jean Paul Chauvet, Lightspeed’s president, allowed in a June conference call with analysts that “You could say that we have an offering now that is getting us closer to Shopify.”
Chauvet’s comment reflects the mood on the Street, which anticipates a market-share contest between Lightspeed and Shopify. A spate of analysts’ reports now raise the question of which company’s stock is the better buy.
They seem to be missing the point, though. For all its success in raising equity capital, Lightspeed is unlikely ever to achieve the ability to outmuscle Shopify.
With 2020 revenues of $ 293 million, Lightspeed has just eight per cent of the sales volume of Shopify. It also has only eight per cent as many merchant clients, at 140,000.
Lightspeed is a model of growth by acquisition, while Shopify until recently relied more on internal, or organic, growth.
Lightspeed has spent about $ 2.5 billion on five acquisitions since last fall, and on a single day in June, announced two takeovers with eye-popping price tags.
It paid $ 628 million for Ecwid Inc., a San Diego, Calif. e-commerce platform that adds more than 130,000 paying customers to Lightspeed’s existing client base.
At the same time, Lightspeed paid $ 535 million to buy NuORDER Inc., a Los Angeles firm whose approximately 100,000 retailer clients use the firm’s platform to automate their wholesale product ordering.
In building its “omnichannel” model of providing one of the e-commerce industry’s widest ranges of services, Lightspeed last fall bought two U.S. restaurant management software firms, for a total of $ 1.1 billion. What’s more, in March it paid $ 440 million to acquire Vend Ltd., a cloud-based retail-management software provider.
Lately, Shopify has found that it, too, needs to take equity stakes in related companies.
Shopify has been buying significant minority interests in the firms with which it partners in supplying its retail e-commerce customers.
Shopify now has a sizable equity stake in a pioneering Israeli firm, Global-E Online Ltd., that enables online merchants to do international transactions in the languages and currencies of customers worldwide. The company has also acquired a minority interest in Affirm Holdings Inc., a San Francisco startup that is now Shopify’s exclusive supplier of deferred payment options.
And in June, Shopify invested more than $ 440 million in Stripe Inc., Lightspeed’s longtime partner in payment processing and other back-office services.
The Stripe deal is especially significant. Shopify has relied on Stripe to offer its popular Shopify Pay suite of banking services, including debit cards, to retail clients; analysts believe that Stripe’s services are now driving about half of Shopify’s business.
These are shrewd, strategic deals that give Shopify control of its most important partners. They guard against those partners being acquired by rivals, including Lightspeed. Further, they enable Shopify to earn a share of the profits made by partner firms whose own revenues are derived in large part from Shopify’s customers.
Still, that mutually beneficial model might not be enough to satisfy Shopify’s growth ambitions.
And Lightspeed’s successful model in rapidly building revenues and capabilities still falls short of the heft that Lightspeed needs in going up against Shopify or the even larger Amazon.com Inc. Amazon derives tremendous revenue from taking a cut of sales generated by third-party vendors granted access to Amazon’s platform.
All new industries consolidate, though usually at a slower pace than we’ve seen in e-commerce.
Meanwhile, the consensus view of Shopify as a viable competitor to Amazon stretches credulity. Though it leads its industry as a supplier of software tools for merchants, Shopify is hugely overshadowed by an Amazon with $ 485 billion in revenues and a market cap of $ 2 trillion.
Shopify, Lightspeed and Amazon’s third-party-vendor division are chasing the same customer, the merchant who wants to sell online and needs help in doing so. Neither Shopify nor Lightspeed have anything near the critical mass required to hold their own against Amazon.
For investors, the only knock against Shopify is its sky-high price-earnings multiple of 77. But that multiple doesn’t look quite so unreasonable when you think of Shopify as takeover bait for Amazon, after a potential Shopify acquisition of Lightspeed.
In assessing such stocks for your investment portfolio, keep in mind that corporate acquirers usually offer a premium of at least 20 per cent to the takeover candidate’s current market price.
Such deals seem improbable until they’re announced. At which point they appear to make all the sense in the world.