Shopify Stock: At Compelling Levels For Longer-Term Investors (NYSE:SHOP)

The following segment was excerpted from this fund letter.

Shopify Inc.

During the quarter, as its stock fell to what we believed were compelling levels for longer-term investors, we initiated a position in Shopify Inc. (NYSE:SHOP), the leading cloud-based commerce software platform. Shopify’s value proposition is to provide a single, easy to use, operating system for merchants to manage every aspect of their business, including selling across multiple channels (direct to consumer as well as on third-party marketplaces like Amazon), managing product listings, inventory, orders, payments, shipments, marketing, and customer relationships. The company has over 1.5 million merchants, who have processed nearly $120 billion of sales during 2020 (and are expected to pass $170 billion in 2021), making Shopify the second largest “behind-the-scenes” e-commerce player in the U.S. behind only Amazon, and ahead of Apple, Walmart, and eBay! Shopify has developed a scalable cloud platform that caters to merchants of all sizes, from a new entrepreneur just starting out to big brands like PepsiCo and Unilever. What we really like about Shopify is the ecosystem the company has built, creating network effects and a virtuous cycle that will be very hard for competitors to overcome. The more merchants join, adopt, and transact on Shopify’s platform, the more partners are attracted to its ecosystem, adding more features and options to the platform (through Shopify’s App store), increasing the company’s moats and value to merchants.

The big picture here is that Shopify is quietly building an Amazon competitor. But unlike Amazon, which also competes with its merchants (through first-party sales), Shopify is in the background, quietly helping merchants of all sizes to sell more online, aggregating the scale of the many merchants it has, to enable the benefits that only the largest merchants could get in the past. The opportunity for Shopify is two-fold. First, it is still early in the adoption curve, with the amount of gross merchandise value transacted on the platform expected to pass $170 billion in 2021 out of a $20 trillion-plus market opportunity (global commerce, ex-China), or less than 1% penetration. Second, as Shopify consistently continues to remove hurdles for merchants to sell online, the company can increase its share of the economics (or take-rate) from about 2.6% currently (Amazon charges between 10% and 20% on its fulfillment services). Lastly and perhaps most importantly, Shopify has a great culture, and it is led by a visionary founder, Tobi Lutke. One example of the company’s culture is a blog post from 5 years ago titled “Value Creation – Building for The Next 100 Years” (how many CEOs think, let alone talk about the next 100 years of their company?). The post starts with the following paragraph: “At Shopify, value creation is measured not just by growth of dollars and cents, but also by the growth of small business, computing literacy, and personal development. We are building for the long term.” In our view, Shopify has all the ingredients necessary to become a core holding and we are excited about its long-term potential.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.