Facebook is on a collision course with Shopify

The tech giants control two halves of the same whole
The post Facebook is on a collision course with Shopify appeared first on The Motley Fool Australia. –

This article was originally published on All figures quoted in US dollars unless otherwise stated.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Facebook‘s (NASDAQ: FB) core business has always been advertising. The company sells highly targeted ads alongside user-generated content to its audience of nearly half of the world. It’s a great business model and one that just brought in more than $12 billion in operating income in its second quarter.

Now, Facebook is thinking beyond ads. Apple’s (NASDAQ: AAPL) app-tracking transparency initiative has made tracking more difficult for Facebook and its advertisers, adding incentives for the company to expand beyond ads.

CEO Mark Zuckerberg spent much of his time on the recent earnings call talking about the company’s push with creators, commerce, and the next computing platform, which he dubbed the metaverse. Of those three growth areas, commerce is the most logical extension for Facebook’s business.

It already has relationships with more than 7 million small and medium-sized businesses (SMBs), not to mention the world’s biggest brands. Many of those SMBs see Facebook as a crucial component of their businesses for things like customer acquisition or even as a full-on digital storefront.

Historically, SMBs used Facebook to attract customers, who then click out of Facebook’s ecosystem to go to the brand’s own website. For e-commerce companies, those sites are often run by Shopify Inc (NYSE: SHOP). Since Facebook is the primary acquisition tool for many of these businesses and has a wealth of data from users and ad clicks, it makes sense for the company to capture all of the value of those transactions, up to the payments themselves, rather than just the ad spend.

Commerce isn’t new for Facebook. The social media giant had previously launched “Shops” on Facebook and Instagram, but it seems to sense opportunity in e-commerce in a way that it hadn’t before.

Opportunity knocks

Annual e-commerce sales are on the verge of topping $1 trillion in the U.S. Globally, that number is significantly higher. For a company the size of Facebook, online commerce is one of the few businesses that’s big enough to really move the needle.

Zuckerberg explained his thinking on commerce simply on the call, saying, “Our approach is to work our way down the stack and build world class services at every layer of commerce — starting from discovery at the top of the stack all the way down to payments.”

In other words, Facebook wants to keep the entire shopping experience on its platform, avoiding the need for users to bounce off its platform onto a brand website or a Shopify store. Zuckerberg noted that clicking on an ad link that takes users off a Facebook site often means having to reenter your payment information, leading to a bad user experience.

Facebook now has 1.2 million stores on Facebook and Instagram Shops. By comparison, Shopify finished last year with 1.75 million merchants using its software. Facebook isn’t far behind the leading e-commerce platform.

What it means for Shopify

Shopify provides software to run e-commerce businesses, and after Amazon Inc (NASDAQ: AMZN), the company has been the biggest winner in online retail. But Apple’s crackdown on ad targeting could be a problem for Shopify because it directly impacts the small businesses the company depends on.

The move is also incentivising Facebook, which is probably Shopify’s largest source of traffic, to invest in its own commerce platform, ultimately moving transactions from Shopify to Facebook. As Facebook improves Shops, it could peel away some of Shopify’s business, especially if it offers SMBs a lower customer-acquisition cost.

For now, Shopify investors don’t seem to have much to worry about. The company put up blistering growth during the pandemic, and in the second quarter, posted 57% revenue growth to $1.12 billion. It’s also solidly profitable. Its outlook called for continued strong growth, though at a more normalised pace than last year.

Zuckerberg acknowledged the commerce initiative would be a long-term one, so it’ll likely take years before Facebook becomes a major player in e-commerce. The Facebook chief said: “This is a long-term strategy and it’s going to take a while before it’s meaningful — especially given the scale of our ads business already — but I’m confident that it’s the right long-term bet and product direction.”

The e-commerce pie is growing and could be big enough to satisfy both Facebook and Shopify, but Facebook’s efforts to keep sales in its ecosystem will have an effect on Shopify. Investors in the latter company should keep an eye on what’s happening with Facebook Shops, especially in relation to Apple’s ad-targeting crackdown. The more Apple squeezes Facebook, the more Facebook is likely to squeeze Shopify, as a result.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

The post Facebook is on a collision course with Shopify appeared first on The Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Amazon and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Amazon, Apple, Facebook, and Shopify. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2023 $1,160 calls on Shopify, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, and Facebook. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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