Why Shopify Inc (US) Shareholders Have Nothing to Worry About

By Brian Stoffel Markets Fool.com

There's an interesting paradox happening right now surrounding Shopify (NYSE: SHOP). The company -- which provides a platform for small and medium-sized businesses to establish an e-commerce presence -- has been in the cross hairs of protestors, led by the group SumofUs.com, for providing a platform for the far-right news agency Breitbart. And yet, the stock has never been better, advancing over 60% this year in the face of the protests.

Continue Reading Below

But the stock's meteoric rise is hardly what I think shareholders should be focused on. In fact, I have little doubt that as a medium-cap stock with booming revenue but no profit to speak of, Shopify's stock will likely have large swings in the not-too-distant future -- both up and down.

Image source: Getty Images

Instead, the thing that investors needn't worry about is the company's moat. In the simplest sense possible, a moat is what keeps customers coming back for more -- day after day, week after week, month after month -- and keeps competitors at bay...for years.

Shopify's greatest moat is provided by high switching costs. Any start-up business these days needs an online presence, and Shopify offers a suite of solutions that are very affordable.

Once you set up your website using Shopify's platform, you would be loathe to switch to another. Plus, those who run such companies don't want to spend all their time worrying about e-commerce; they want to be focused on providing the best possible product or service that they can. That's where their enduring value is added.

Continue Reading Below

Proof -- anecdotal and otherwise -- of Shopify's moat

In an odd way, the protests touched off by SumOfUs have offered a good test of Shopify's moat. After all, it's one thing to sign a petition saying that you think Shopify should deny service to Breitbart; it's another thing entirely to switch e-commerce platform providers as a result of those beliefs. The former is empty virtue signaling, while the latter involves skin in the game.

In a recent Fast Company article, a developer described the difficulty of migrating away from Shopify:"Migrating a pre-existing store from one platform to another is, candidly, a royal pain in the [butt]. A lot of times, what I'm doing is helping them migrate from somewhere else to Shopify, and that can run them tens and tens and tens and tens of thousands of dollars in branding things, development things, data-migration tasks."

And if that's not candid enough for you, check out what the owner of an online yarn and fiber store tweeted when migrating away from Shopify (edited for content): "what the [heck] I can't afford this again... #DeleteShopify"

We can commend the owner for her candidness, and for putting her skin in the game. But her tale is telling: The switching costs are sky-high.

And if you need more than anecdotal evidence, look no further than Shopify's growing client base.

Signs of a Strong Moat

At the same time, average revenue per merchant has increased from $1,000when the company went public in 2015 to $1,243 today. Over such a short time frame, both merchant growth and revenue per merchant have shown strong growth rates -- 62% and 13% per year, respectively.

When you have growth like that, and customers become locked in with high switching costs, you have a very solid moat. It's why I continue to be an excited shareholder, and can't wait for the stock's current upward trajectory to take a breather so I can add more shares to my own portfolio.

10 stocks we like better than Shopify
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Shopify wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Brian Stoffel owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.