Why a Value Investor Bought Shopify Stock

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Benjamin Graham-style value investing -- purchasing a company well below its intrinsic value -- is a method dear to my heart. Buying shares of a company that overly pessimistic investors have pushed down, and then watching the shares rebound over time, has served me well, especially during the financial crisis of 2007 to 2009.

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So you may wonder why a bargain enthusiast like me would be interested in Shopify (NYSE: SHOP). The cloud-based software provider for retailers looking to unify their physical stores with an online presence doesn't even come close to qualifying as a "value" investment. In the past few years, the still-unprofitable company's revenue has doubled twice, but the stock price has outpaced even that impressive run.

The reason I broke down and purchased shares of this high-flying money-loser has to do with the future, not the present.

Value versus growth

The way I see it, value investing is about the present. Sometimes, because of numerous factors, negativity pushes a stock down to prices that don't fairly reflect the company's performance.

On the other hand, investing in growth is all about the future -- how fast revenue is increasing, and the potential bottom-line returns that could eventually follow. In the case of Shopify, growth has so far been unstoppable. It helps that while the goal at Shopify is to eliminate hurdles for entrepreneurs, heavy hitters such as General Electric, Tesla, and Subway have utilized its services as well.

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The company isn't slowing down, having recently completed another equity offering, with proceeds of $5.5 million going into Shopify's coffers. While that move dilutes existing shareholder ownership, the goal is to use those proceeds to continue growing the pie for everyone. Maybe that will come through another acquisition, considering Shopify has bought four smaller tech companies since April last year.

Whatever the plan is, management sees 2017 revenue increasing about 60% from last year. Revenue has been steadily rising and it's hard to ignore a company that's having that kind of success.

Real deals are scarce

Since the long-forgotten market correction of early 2016, stocks have been rising relentlessly. Finding good companies on sale because of investor pessimism is getting harder.

One area that's been getting beaten up, though, is retail. Online sales have been growing in the double digits for years and cutting into the sales of traditional stores. So far, this year is setting a record for the number of store closures and could even surpass the previous 2008 record of 6,163, according to a Credit Suisse report.

Normally, a downtrend like that would have me excitedly scooping up deals, but internet disruption is leading to steep declines in foot traffic everywhere, and it's affecting the entire industry and possibly changing it permanently. I do own shares of Target and Dick's Sporting Goods and have seriously considered a few other traditional merchandisers, but picking retailers that are truly a value could be a higher-stakes game than picking newer tech-savvy entrants.

Shopify stock certainly isn't cheap using current valuation metrics. Profitability is not the goal right now as the company is investing for future growth, and the total loss for 2016 rang up to over $37 million. The company sees operating profit margins staying at around -11% of gross revenue for 2017 -- though it bears mentioning that in the first quarter the company beat its own guidance with an operating loss of only $14 million versus the $20 to $22 million forecast.

It's clear the real metric to look at is Shopify's ability to aggressively grow revenue. Profitability will be a discussion down the road. With the stock pulling back after that recent equity offering, I was swayed to pull the trigger in the belief that revenue will head higher.

The online retail revolution 2.0

Where companies such as Amazon.com and eBay made it easy for anyone to sell something online, Shopify is one-upping that idea and helping businesses launch their own digital stores. I like the empowerment of the little guy, and Shopify might be the big name that helps them.

Only time will tell, though, if my purchase contrary to habit will pay off, or if I'll later regret chasing the Shopify stock bandwagon.

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Nicholas Rossolillo owns shares of Dick's Sporting Goods, Shopify, and Target. The Motley Fool owns shares of and recommends Amazon, eBay, Shopify, and Tesla. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.