Shopify Is Just Scratching the Surface

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Shopify (NYSE: SHOP) investors have been well rewarded in the past few years since the company's IPO, and it shows no signs of slowing down.

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In this Industry Focus: Tech segment, host Dylan Lewis is joined by analyst Michael Douglass and summer intern Ryan Reeves to explain how a company that's already grown so much can still have such a huge untapped addressable market pool. They also talk about some exciting new areas the company is expanding into, as well as Shopify's recent partnership with eBay.

A full transcript follows the video.

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This video was recorded on July 21, 2017.

Dylan Lewis: Bringing it back around to Shopify, I think the exciting thing is, for as much as they've grown, and as much as their share price has appreciated in the last couple years, it feels like they're really just starting to scratch the surface of the market they're in. Do you want to talk a little bit about what that total addressable market, that TAM, looks like for them, and what that market opportunity is?

Ryan Reeves: Yeah. They target mainly small to medium-size businesses, and they estimate there's about 46 million of those worldwide, meaning under 500 employees. As I said, the average revenue per user is about $1,200. So if you multiply $1,200 by 46 million, you end up with around $55 billion. So they're on track for doing around $570 million in revenue, so we're just getting started. If they capture 10% of that, that's 10 times the amount of revenue.

Lewis: That's gaudy growth. Something else that's kind of interesting to me with this business is, even after the rise that it's gone on, it's still just under a $10 billion company, which is a lesson in why investing in small- and mid-cap companies can be very good for your profile you if you pick good ones.

Michael Douglass: I think that also highlights, one of the other things to keep in mind is, sure, Shopify's main thing is small and medium business. But as Ryan already pointed out very ably earlier, there are a lot of big businesses that are getting involved with Shopify, too. So if you think about the opportunity there, that could expand, perhaps, that total addressable market, to make it even bigger.

Lewis: And beyond what they're doing right now, they also have some other growth initiatives in the works. My understanding is, you talked a little bit about shipping and capital -- do you want to touch on some of the stuff they're doing there?

Reeves: Yeah. Shopify Capital gives a little bit of seed money to business owners that will be interested in using Shopify and expanding their platform. Shopify Capital is growing pretty quickly. Something that they've rolled out pretty recently is the point-of-sale system. So they're kind of competing with Square now in this space. If you go to a farmer's market or any small business, you see that iconic Square. It's white, little --

Lewis: Credit card reader.

Reeves: Exactly, the card reader, you see that. Shopify is trying to take some market share there. And if you already have your e-commerce platform set up, it seems kind of natural to use Shopify's point-of-sale system as well. And, actually, another development, just last week, they made a partnership with eBay, actually. It seems like a symbiotic relationship, taking out one of their competitors and bringing them into the Shopify ecosystem.

Douglass: And just that integration across the board, enabling Shopify to do more and more things, I think is such a powerful opportunity for them, sort of like a sticky relationship, network effect kind of thing, because so often you have WordPress for your website, or something for something else, and Square for a third thing. But if someone can offer all of that, particularly because they're integrating it all and doing it cheaply, they're able to do it at a lesser cost than each of those things individually, why wouldn't you go there?

Lewis: And all of Shopify's incentives align with people that are using the platform. It's a symbiotic relationship. They grow as all of the smaller merchants grow. So as you're processing more orders, you have more transaction volume come through. That's going to benefit you; it's also going to benefit Shopify. So they want to see everyone succeed on their platform.

Douglass: Yeah, they want to help you grow your business if they can find a way to.

Reeves: Exactly. Tobi Lutke has a quote: "Shopify is exactly this: the only platform you need to build your empire. Shopify is the first thing clients log into in the morning, and the last thing they log out of at night."

Dylan Lewis has no position in any stocks mentioned. Michael Douglass has no position in any stocks mentioned. Ryan Reeves owns shares of Shopify. The Motley Fool owns shares of and recommends eBay and Shopify. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.