In this segment from Market Foolery, Mac Greer, David Kretzmann, and Jason Moser talk Shopify (NYSE: SHOP), a fast-growing company you many not know by name, but one you have probably interacted with if you do any shopping online. Its sales were up 86% year-over-year, and the team explains why there is reason to believe that growth at these impressive rates could continue for quite some time -- or even accelerate.
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A full transcript follows the video.
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This podcast was recorded on Feb. 15, 2017.
Mac Greer: Shares of the e-commerce platform up big onWednesday after the company reported better thanexpected earnings [the stock has gained 12% since the release].David, I think for a lot of investors,Shopify is not exactly a household name. The stock hasreally been on a tear, though.
David Kretzmann:Yeah,Shopify is a company that'sin the background, but you've probably interacted with itsplatform in some shape or form. Thecompany serves almost 400,000 merchants, mainly small and mid-size businesses. So,if you're a small business looking to get online andhave an online shopping cart,Shopify is one of the platforms to go to if you're looking to set up a shopping cart, set up that online platform to offer goods and services online. A lot of smaller businesses are among Shopify'scustomer base. This was a great quarter. The company is having no problemgrowing quickly right now. Sales were up86%, they added 50,000 merchants, bringing that total to 375,000 merchantsunder their umbrella. That's up more than 50% from where they were at the end of 2015.
So, a lot of growth here. Andthe market opportunity hereis still pretty big, andI think that's why, even though the stock is trading at a premium valuation, this level of growththeoretically could continue for a while. If you look at the key geographies where Shopify operates today, there are about 10 million merchants with less than 500 employees in those markets. That's really thekey demographic that Shopify is going after. And every time, the averagerevenue per merchant on Shopify'splatform is above $1,200 now. That wouldsuggest a market size of about $10 billion. So, still a lot of room to run here, but the stock is still pricey.
Jason Moser:Yeah. We've looked at Shopify for MDP, it'sobviously a recommendation in a number of our services here. A veryfascinating business from a number of different perspectives. There are a couple of things,questions I still need answers to here. No. 1 isjust from the profitability perspective. They are growing,still not profitable, notcash flow positive. I wonder when isall of that going to change? BecauseI think if it does change,when it does change, it could be atremendous catalyst, butI also wonder how much the market is pricing into there today.
Butthe other question I have is just in regard to third-party relationships. With everything that Shopify does well, there is a provider that's helping them along the way. And I'll use payments as an example. They contract withStripe,I believe, as a provider on the payment side. At some point, Stripe isgoing to look to become profitable, and they'regoing to try to exercise a little pricing power, which, in turn, is going to flow through Shopify's financials, unless they figure out a way to diversify from that provider as well. So, I just wonder, from the perspective of those third-party providers, how that plays out on this business down the road, and its profitability.
Greer:Andalong those lines, they've also got one of thosefrenemy dynamics with Amazon. Theycompete with Amazon, but they're obviously apartner of Amazon's. So,David, when you think about that frenemydynamic, as a potential investor in Shopify,how much should that concern you?
Kretzmann:I think it'ssomething to be aware of. I think some peoplegave Shopify a little bit more credit than it deserves for thetransition Amazon made from its web store business. In 2010, Amazon launched asimilar business to what Shopify has done. It was a few years after Shopify had started, and Amazon essentially said, "We havea lot of third-party sellers on Amazonand we want to build a web store for those sellersto have their own independent website," which isessentially what Shopify did.Amazon shut that down in 2016 and basically made it easy for thoseAmazon webstore sellers totransition or migrate toShopify's platform. So,Shopify called itself the preferred migration partner. Butwhat a lot of people don't say is that there were only about 1,000 merchants on Amazon's platform last year. So, it's a win for Shopify, but it's not a huge catalyst, I don't think.
Youwant to be aware of all those dynamics. To a similar point,it's not just with Amazon, it'salso with those third-party merchants, the payments providers, the shipping solutions,because you have a lot of different companiesproviding those services. You haveother online marketplaces likeEtsy, which are branching more and more into Shopify's territory. So,I can see why people are excited about the business,because on the surface,this is a potentially very attractive business,because it's recurring revenue, it's a subscription fee,Shopify is bringing in monthly subscription revenue. If they can retain those enterprises over time, that could be very profitable. But up to this point, the company's losses are expanding, still burning cash. It's a riskier stock, still.
David Kretzmann owns shares of Amazon and Etsy. Jason Moserand Mac Greer have no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Etsy, and Shopify. The Motley Fool has a disclosure policy.