Unlocking Growth Potential: A peek in the bag with Shopify

Ticker: SHOP
Sector: Technology
Industry: Software Application
Headquartered: Canada
Moat: Switching Costs, Network Effect

Action at date of this post

Hold as of 3.21.2024
This is a solid company that if you have it you hold it. If you are still building your position, look for solid entry points. This opinion a result of stretched valuation.

Shopify Corporate Overview

Shopify is a leading global commerce platform designed to empower businesses of all sizes to sell their products online and in physical retail locations. Founded in 2006, Shopify has evolved into a comprehensive ecosystem that enables entrepreneurs to create and customize their online stores, manage inventory, process payments, and track sales through its user-friendly interface.

At the core of Shopify’s offering is its scalable and flexible cloud-based software as a service (SaaS) model, which eliminates the need for businesses to invest in expensive infrastructure or technical expertise. This allows merchants to focus on growing their brands and reaching customers across multiple channels, including websites, social media platforms, and marketplaces.

Key features of the Shopify platform include a wide range of customizable templates and themes, robust analytics and reporting tools, seamless integration with third-party apps and services, and a secure payment gateway that supports major credit cards and alternative payment methods. Additionally, Shopify provides comprehensive customer support and resources, including educational materials and community forums, to help merchants succeed in the competitive e-commerce landscape.

Shopify Segment Analysis

Shopify reports in two segments – subscriptions and merchant solutions. Subscriptions includes the monthly software usage fee and is one third of revenue. Merchant solutions are add-on solutions like payments, shipping, financing and app store sales. Merchant solutions makes up two thirds of revenue.

Shopify Moat Source

Shopify currently has a narrow moat but is growing by the day. The foundation of the company’s moat is switching costs. For many small to mid-sized businesses, a platform switch would cost too much in time and money. The company also operates an app store that offers over 10,000 apps that extend or enhance the core products features. The app store helps draw in a network effect. As well, the company has a network of referring partners.

Growth Outlook

The most recent quarter reports came in strong with subscription revenue growing 31% YoY and 21% growth in merchant solutions on a YoY basis. After a rough period post-pandemic, the company has slimmed down and focused. The company now boasts 10% market share in US e-commerce and ~6% of European e-commerce.

The company’s origins are in helping small to mid-sized businesses (SMB) to create, launch and sell online. While that is still the focus of the company, their success in this area has led many of their subscribing businesses to realize success themselves. To this end Shopify has created the tools and infrastructure to scale with their customers thereby lowering churn. The company now targets larger e-commerce platforms with Shopify Plus which is aimed to be an enterprise solution. 

With more than 1,000,000 merchants on its subscription platform and 5,000 Shopify plus customers, the company is far ahead of any competing companies. Having the resources and drive to work with larger, stickier Shopify Plus customers will result in more stable earnings.

The Numbers

Shopify is still a young growth company whose numbers still reflect such reality. Revenue growth is solid but the costs are still high for the growth. Shopify is one of a small number of stocks in my universe that I excuse from typical analysis. This is an example of a growth stock that I believe in the management and the product.  Like the early days of another e-commerce giant, it’s ok to have a few “flyers” in your portfolio that you watch closely. 

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing this post, the author does have a position in SHOP.