Why Shopify is valued higher than Woo Commerce by a public market

I saw a discussion on Twitter while laying in bed last night. You can catch up right here.

Essentially, it asks… why is Woo Commerce, which has a larger install base, valued so much lower than Shopify by the public market?

A bit of background; Woo Themes, the company that built and maintains the Woo Commerce WordPress plugin, was recently acquired by Automattic for — as some have reported — around $30M in cash and stock (remember this stock part in a moment). Shopify, an ecommerce platform built on Rails by Tobi Lütke and his amazing company, went public this week and the public market valued them well over $1B.

So, why is Shopify valued so much higher than Woo Commerce? Let’s break it down.

Software companies are acquired for a variety of reasons; Some are acquired for their user base + growth (see: Instagram). And some are acquired for strategic reasons to bolster the offerings of the acquirer. And, finally, some are simply purchased for the intellectual property, patents, and or employees.

With Woo it would appear that all of these were factors in Automattic’s decision to acquire them. They have revenue, their product is incredibly popular, they are growing, and they have 55 employees or so. And, to top it off, their company culture seems to align very well with Automattic.

So, why $30M? Using this number we can back into a few guesses as to Woo’s revenue and how Automattic valued them. Again, these are just guesses.

Software companies, even profitable ones, are sometimes valued by their revenue multiplied by some number based on their growth. So if Woo made $1M one year and $5M the next, that would show a fair bit of growth and they could likely get a multiple at the high end of the spectrum… let’s say 5X. So, if Woo was growing their revenues really, really well I’d say they may have gotten 5X revenue. This would mean Woo was likely generating somewhere between 5 and 10M annually at the point of acquisition.

However, if Woo was an agency providing services to clients this multiple would be considerably lower. Say they made $5M in a year but all they did was build websites for clients over and over, this isn’t nearly as valuable as a software product and so they’d likely get 1.5X of their profits not revenue if they were showing growth.

When evaluating the value that Automattic gave to Woo for their company remember that the estimated $30M deal was done in both cash and stock. Let’s say that Woo got $15M in cash and $15M in stock. This could, over time, value Woo at much more than $30M. Certainly having Woo Commerce be part of the Automattic offering will make both Woo Commerce and Automattic far more valuable than not, so I think it was smart of the Woo team to accept stock in Automattic.

Automattic’s last round of funding valued them at just over $1B. However, they are clearly growing and so the $15M in stock that Woo founders now own will, almost surely, be worth several multiples of that should Automattic ever be purchased by a larger company or — as Shopify did — go public. Let’s say between now and that event that Automattic doubles in value, this would mean that this deal would now be worth near $45M.

Some on that Twitter thread rightly pointed out that Woo was profitable and Shopify lost money. Yes. That is true. But that doesn’t matter to a public market. In fact, many if not most companies that go public are losing money when they go public. The entire purpose of going public is to raise more money. Companies are only allowed to raise money from a finite number investors before needing to go public. I think it is 2000. That sounds like a lot of investors… but when Facebook went public — like many other companies — they were using investment firms to cull capital together from many investors under a single umbrella to “beat the system” for as long as they could.

Shopify’s revenue, according to their F-1, was roughly $37M in the first quarter of this year. So, according to my napkin math, that’s easily 6 or 7 times the revenue that Woo may have generated last year. Again, I’m just guessing.

So while Shopify lost $4M in this quarter they earned $37M. Making up that gap with those sorts of revenues in the ecommerce space is — relatively speaking — fairly easy. Shopify is growing and investing pretty rapidly. So it is perfectly normal for them to be burning capital to be able to do so. In fact, if I was buying Shopify stock I would hope they’d be spending money on growth. Shopify is doubling revenue year-over-year. So, please, grow!

Anyway… I hope this explains why Shopify would be valued much higher than Woo in a public market. Shopify did not get acquired. If they did, at the moment they went public, it likely wouldn’t have been for what the market valued them at. Probably around $800M (Revenue 5X). Again, just me guessing.

Side note: How awesome is their ticker symbol?