The gig economy is transforming the way people work, travel and buy products. Some of the companies behind these trends are household names.
Shopify (SHOP) is not one of those, but the tiny Canadian company is winning at ecommerce. Managers unveiled a slew of new products and services last Wednesday.
Investors should take note. This company is on to something big.
That assessment might seem laughable. Shares are up a staggering 136% this year. The market cap has climbed to $36.6 billion.
In addition to making its founders billionaires, the dizzying ascent has created a cottage industry for bears.
Shopify is the product of Tobias Lütke, Daniel Weinand and Scott Lake. It was only 15 years ago when the trio were trying to build an online store for Snowdevil, their snowboarding equipment business.
Lütke, a German immigrant, used his computer programming background to cobble together a storefront, according to a 2015 feature story in The Globe and Mail. Two years later, in 2006, Lütke, Weinand and Lake launched Shopify.
It was no overnight success story …
Shopify was born in the era of Amazon.com (AMZN). Ecommerce was catching on, but many customers still didn’t trust the internet, let alone a tiny Canadian business with little more than a website.
The company caught a break in 2010 with a mobile application for iPhones. Product managers used the launch to promote a build-a-business competition. There was a cash prize and mentorship from Sir Richard Branson.
DODOcase, a San Francisco maker of high-end iPad cases, was the initial winner. Patrick Buckley, the company founder, used Shopify to market a case that transformed the popular tablet into hardcover notebook.
It was marketing gold.
Since then Shopify has acquired nine companies, according to Crunchbase. The process began with mobile app design studios. By 2013, the company was building a payment platform. It even had software that turned an iPad into a point-of-sale terminal for brick-and-mortar retailers.
The company announced in 2014 that 100,000 retailers from 150 countries had set up shop.
Then, in 2017, Spotify announced the Amazon Sales Channel. With only a few clicks, sellers could simultaneously list their wares on Amazon.com.
Today, Shopify is a full cloud-based ecommerce platform with multiple channels. Customers can easily monitor their web, mobile, social media and physical storefronts. They can manage inventory, process and ship orders, and build customer relationships. There is even robust data analytics, reporting and access to financing, too.
Last week’s announcement brings 11 new languages to Shopify. It also adds a fulfillment network, better customer-facing software tools, and several software developer kits that make it easier to build and embed applications that can be deployed everywhere.
In many ways, Shopify is building a business that looks like more like Salesforce (CRM) than Amazon.
And that is where the confusion begins.
While both Shopify and Amazon compete for third-party retailers, the actual relationship is more friendly.
Amazon Webstores began in 2010 as a way for product sellers to access the scale of Amazon distribution, in exchange for a monthly fee of $78 and about 3% of sales. The online giant closed that business to new sellers in 2015, fueling the rise of Shopify.
Amazon Marketplace has since replaced Webstores. And most accomplished merchants use both marketplaces. The companies are codependent. They need a healthy third-party seller ecosystem to source more products and grow the ecommerce pie.
Bearish traders argue that Shopify is grossly overpriced by any metric …
The stock sells at 350x forward earnings, and 31x sales. Facebook (FB), for example, beloved for its meteoric growth, trades at 20.4x forward earnings, and 9.1x sales.
Based on multiples alone, Shopify seems extremely expensive. However, simple financial multiples oversimplify the ecommerce landscape.
The global ecommerce market was $2.8 trillion in 2018, according to a research report from Digital Commerce 360. It is expected to reach $4.9 trillion by 2021. And Statista shows that online sales are projected to reach 17.5% of overall sales by 2021.
Shopify is helping small businesses get into the game. Right now, it’s tiny. In 2018, the value of all of the goods sold on its platform amounted to only $41 billion, or 1.5% of global online sales.
However, the company is growing quickly. Its commission revenue jumped to $1 billion in 2018, a 59.4% increase year-over-year. Shopify is also aggressively building out its portfolio, with best-in-class value-added products and services.
Shares reflect the expectation Shopify will emerge as one of the ecommerce platform winners in a sector that’s expected to be a gigantic one.
That’s a good bet.
Investors should be looking to buy this stock– currently trading at $311 and change — into the next major pullback. Shares could easily trade to $520 over the next three years as sales push toward $2 billion.
Jon D. Markman