Is Facebook killing Shopify?

Social media company Facebook announced that it will feature a shopping window for its advertisers For the time being, this experiment is only featured on its platform for users in North America. In addition to this virtual store window, a new advertising format is introduced in which users can look into retailers catalogues: “Canvas”. Is Facebook (symbol: FB) aiming to become a new shopping channel?

According to Facebook, its platform is increasingly being used to discover new products. Therefore, the company sees a lot potential in better user experience in retail content. It seeks to meet both ends: consumers are more likely to click on ads and retailers can see better hit rates on their Facebook activities. The Menlo Park-based company already offers direct shopping channels for (smaller) retailers. Within Facebook Pages, business can set up a store with a direct buy button and checkout option. It is to believed that this option is a success and that Facebook as a result is expanding its shopping activities. It is probably only a matter of time we see global coverage of this feature.

The new features are a clear attack on Shopify (symbol: SHOP). This company offers software for online stores and became a listed company in April 2015. Needless to say, shares of SHOP were severely hit by Facebook’s announcement. Shopify’s platform hosts over 120,000 online retailers, but when retailers can also sell their products within their Facebook page, there is less need for Shopify connection. Or at least its fees will get under pressure. Shopify is expected to book USD 182.8million revenues this year (Thompson Reuters analyst estimates). Last year, the company recorded revenues of USD 105.0 million. The company is currently trading at 17.2 times its trailing twelve month sales, compared to Facebook’s 18 price/sales-ratio. Both at elevated levels, one might wonder if they can deliver these hefty valuations. Shopify is not expected to be profitable within the next few years.

Shopify may get more competition. Google is also working on a direct buying feature. Facebook and Google are aiming to keep their traffic within their virtual walls or at least the margins dripping from the traffic. Therefore both companies will try to chain retailers as much as possible on their platforms. A big challenge is the mobile segment. According to research firm eMarketer, mobile purchases are still only 2% of total retail sales. Nevertheless, US mobile retail sales are expected to reach USD 31 billion by the end of 2017, a study of Forrester Research tells us. The problem of mobile shopping is the long loading time and less user friendliness. Improvement of this is the core of Facebook’s product strategy. Facebook is aiming at a large chunk of the mobile segment, which undoubtedly has a lot of potential. It’s new Canvas is based on a fast-loading user experience.

With over 1.2 billion Facebook users it surely has a large potential client base to offer. What makes Facebook more interesting (it’s competitive advantage) than others is the likelihood of sharing products and experiences. The newly announced ‘products’ are certainly hot items to watch for from a business perspective. And (shareholders of) Shopify, beware!

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