The Child of E-Commerce
An in-depth stock analysis on Shopify Inc
Hello investor 👋,
I’ve done the research so you don’t have to. This week’s stock report for premium subscribers: Shopify. All premium subscriber perks, here.
If Amazon is the parent of e-commerce, Shopify is the rebellious child. It’s a core position in my stock portfolio (and my most profitable one), one of the fastest-growing Canadian stocks of all time, and a business growing 20%+ annually operating with a sticky, wide moat. It’s an amazing company and one of my all-time favourite stocks, and I’m excited to share this absolute beauty of a business with you all today.
Let’s get into it. (24 min read)
Today at a glance:
Snowboards & some code (history)
Business model & analysis
Management quality
Stock performance & financials
Risks, moat & competition
Growth aspects
Valuation
Snowboards & some code (history)
Fun fact: centi-billion dollar technology companies are founded in either one of two ways: in a garage, or by selling snowboards online. It’s an oddly consistent recurrence I’ve come across lately, and Shopify is part of the latter.
Founding
Shopify was founded in 2004 by Tobias Lütke, a 22-year-old tech visionary in love with a woman named Fiona McKean, his future wife, whom he met during a winter vacation in Canada. Two years prior to founding the company, Tobias had moved to Canada from Germany to be with Fiona. However, upon arriving, he faced a tiny problem: he didn’t have a degree and couldn’t get a work permit.
At this point of his struggles, the only thought that came to Tobias’ mind was starting a business.
Tobias had known how to code from a very young age, working as a programmer at Siemens when he was just 17. While he couldn’t land a day job, he certainly had the skills to start a business. Since he had nothing to lose, he went for it. Combining his hobby of snowboarding with his desperation to generate income, his coding skills, and his interest in online commerce, Tobias started an online shop selling snowboards called Snowdevil.
At first, he thought he would find some pre-existing software or website code to get started, but, of course, he couldn’t find anything that fit his vision. So, like anyone in his shoes, he created his own solution, writing the website code he wished someone else had made for him, using a framework based on Ruby and JavaScript languages. Days turned to weeks. Some traffic trickled into his store during this time, but commerce activity remained silent—the kind of silence that makes your ears ring. Then one day, Tobias received an email that would change his life, and millions more.
He was ecstatic. ‘Adrenaline’ wasn’t a word anymore. It was beyond an emotion at this point. It was an intense feeling. Sitting in a coffee shop looking over his inbox on his computer that included proof that what he did might have actually worked. With his heart pounding out of his chest, lungs expanding beyond his stomach, and sweat dripping from the side of his face onto his lap, Tobias patiently read the email:
Hello there, this email is to notify you that [Shawn P.] in [Pennsylvania, USA] has purchased the Arbor A-Frame Snowboard from Snowdevil. Please log in to see shipping details and payment info.
“I remember sitting there staring at this [email] and having this moment of like, I’m no longer just a builder, but now I was an entrepreneur.” — Tobias Lütke
Relief kicked in immediately, and Tobias celebrated with a sip of coffee. That email proved his concept—and it was all he needed.
From there, Snowdevil sales started picking up. Tobias had officially built a successful business, and everything was going better than he had ever expected. But there was something more. The feeling from that first sale overshadowed all the subsequent successes. That drive Tobias had, and the experience that particular sale brought him, led him to ask a simple question: “Are there more people like me who want this… what if they don’t know programming?”
Thus, partnering with friends Scott Lake and Daniel Weinand, he set out to build a company that would allow anyone with a drive for entrepreneurship to sell online and make their first sale with the simple click of a button.
“And then, we called it Shopify.” — Tobias Lütke
The years following
After working on the software for a little over a year, in 2006, Shopify was officially launched, allowing anyone with an internet connection to set up an online store within minutes. The years that followed brought innovation and growth that together revolutionized global online business commerce1.
2007: Shopify launches the Shopify App Store, allowing third-party developers to create and sell apps on Shopify.
2010: Shopify launches a mobile app, allowing merchants to manage their stores on the go.
2013: Shopify launches Shopify Payments, creating an in-house payment processing platform and streamlining checkout for Shopify merchants.
By the end of 2014, Shopify already had over 120,000 merchants using the platform. A year later, they went public on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE), raising over $120 million in the process and giving the company a valuation of over $1 billion. Shopify continued innovating, launching new services and features like Shopify Plus, Shopify AR, Shopify Balance, the Shopify Fulfillment Network, and more.
When 2020 came lurking around the corner, bringing everyone’s favourite respiratory disease along with it2, and a drastic increase in online ecommerce, Shopify saw massive growth.
During this time, Shopify expanded vertical integration partnerships with social media platforms like TikTok, Facebook, Amazon, Google (YouTube, Search) etc., to further increase the marketing channels for Shopify merchants, and acquired Deliverr, a fulfillment company, to increase its logistics network. They also launched Shopify Capital, a loan platform for merchants; Shopify Audiences, a better way to increase visibility of your store through integrated digital advertising; and the Shop App, a free app allowing consumers to order from their preferred Shopify merchants while also serving as a single hub to track online e-commerce orders across all platforms.
Shopify’s ease of use for consumers, its many features exclusive to the platform, constant innovation, expanding vertical partnerships, and simple UI pushed it to the forefront of North American small business ecommerce. These attributes carved the way for Shopify’s continuing success up until today. The platform was so effective and simple that large multinational companies, popular influencer brands, and Shark Tank businesses jumped onto it. Notable brands that use Shopify include Kylie Cosmetics, Sephora, Heinz, Gymshark, Red Bull, Steve Madden, Hasbro, Netflix, Bud Light, Fitbit, and many more. Heck, even Wikipedia sells on Shopify—and so does Ring, which, if you didn’t know, is wholly owned by Amazon (this should tell you about the product offering).
Obviously, Shopify developed a superior product, and these attributes are generating huge amounts of loyalty, which in one way or another translates to high product usage and revenue, which in turn hugely benefits the business’s bottom line. Speaking of business, I think it’s time we dive into that.
Business model & analysis
Shopify is a Canadian e-commerce company that provides businesses with online tools to create, customize, and manage stores on the web. They sell simple, easy to use, relatively inexpensive, web hosting software3 helping entrepreneurs, online content creators and the like, to list, market, and ship their products (and more), under one single ecosystem.
Business model
Shopify makes its revenue from two distinct areas4:
Subscription Solutions (28% of revenue).
Merchant Solutions (72% of revenue).
Subscription Solutions is revenue that comes from merchants paying for access to Shopify’s platform or tools, mostly Shopify’s monthly plans, which come in three tiers (Basic, Advanced, Plus), starting at $39 per month for the Basic plan, up to $2,000 per month for the Plus or enterprise plan. This revenue segment also includes Shopify Point of Sale (POS) systems and software (devices used to accept transactions in person), as well as app store and theme store fees.
Merchant Solutions is revenue generated from anything tied to Shopify merchants’ success. This is revenue that grows as merchants grow (sell more). This mainly includes payment processing fees generated through Shopify Payments, where Shopify takes 2.9% + around 30 cents per transaction. Shopify doesn’t keep this entire amount; instead, it pays most of it to the card networks (Visa, Mastercard, Amex) and its payment facilitator, Stripe (and also PayPal for some parts of the U.S.), while retaining the small remainder (typically 0.9%-1% of the total respective transaction fee generated). The fee for Shopify Payments varies based on the selected plan. Other Merchant Solutions revenue includes Shopify Shipping, Shopify Capital, Shopify Fulfillment Network, Shopify Tax, and currency conversion.
To better understand Shopify’s main model, here’s a scenario of a newfound entrepreneur, creator, or merchant looking to switch to Shopify: First, the merchant goes to Shopify, creates an account, and signs up for the Basic plan. Next, they’re greeted with an easy-on-the-eyes dashboard with a tutorial pointing to each section on the sidebar, explaining the use of each.
The merchant is then prompted by a pop up to buy a domain for their website, until being met with many amazing templates to start building their simple drag-and-drop Shopify store. They then set up payments and notice a 2% discount on the processing fees if they simply use Shopify Payments instead of a third-party processing network. The merchant makes the obvious decision, and sets up Shopify Payments in a few clicks. They’re now ready to sell, and depending on whether they are already a creator with an audience or a multinational corporation with a customer base, this may be the last step. All they need to do now is link the store to their customer base or audience.
However, for our scenario, let’s assume this is a first-time entrepreneur selling handmade car figurines for example—someone without an audience or existing customer base. After the basics are set up, they can easily start marketing their store right from the same dashboard by downloading a Shopify app extension that connects their social media account to advertise on their preferred platform. In this same app store, they can also sign up for the Shopify Fulfillment Network to streamline shipping. And later, if their business is successful, can also apply for Shopify Capital and receive capital from Shopify to grow (which Shopify finances themselves, leveraging its access on the merchant’s store data to underwrite the business better than a bank, paying themselves the loan back via percentages of the merchant’s daily store sales).
Shopify’s model here, if you didn’t notice, is, throughout this process, leveraging its simplicity, scale, and cost—not only to give its merchants the best features and ways to grow their businesses in the best way possible, but also doing everything possible to keep its own in-house products and alternatives cheaper. Shopify earns from an ecosystem benefiting from the growth of its customers (the businesses hosted on its platform), which it heavily prioritizes by adding features, leveraging its scale to get lower prices, forming partnerships, and more.
What I mean by this is simple. Shopify Payments is not payments facilitated by Shopify, but instead, run with Stripe (and now recently PayPal too). Shopify Fulfillment Network is not logistics facilitated by Shopify, but instead, by Flexport (who Shopify sold its logistics business to last year). Shopify merely uses its brand name and scale to leverage strategic partnerships that benefit its merchants and their ability to save costs, and run as smoothly as possible.
From this, Shopify’s business benefits from a flywheel model, where the simplicity and ease of use (and other factors) of setting up an online store for merchants attracts more merchants and therefore more subscription revenue from the plans, which leads to more capital to leverage for strategic partnerships and more features and solutions to further enable that simplicity and ease of use. This leads to more merchant sales and merchandise volume (GMV) as those features bring in better ways for merchants to monetize, which attracts more merchants… and (🔁):
Although Shopify does not disclose the exact amount they generate from Shopify Payments, assuming industry-average take-home cuts from the transaction fees, Shopify Payments ends up accounting for the majority of its Merchant Solutions revenue segment. This means that a significant portion of Shopify’s actual revenue comes from its payment processing fees (I should also mention that 53% of total Shopify merchants use Shopify Payments). Thus, when we add this to the flywheel, we can start to see how powerful this business really is.
Shopify earns revenue on a recurring basis from the monthly platform plan that merchants need to subscribe to in order to use Shopify. It then leverages this recurring revenue to form strategic partnerships that enhance features and drive innovation, creating even more value. Shopify also generates revenue from third-party apps in the Shopify App Store, which, most of the time, are also strategic partnerships. Its partnerships with Google Domains (now a subsidiary of Squarespace) to offer Shopify Domains, Stripe to provide Shopify Payments, Flexport to create the Shopify Fulfillment Network, and many others, are all added revenue streams that make the Shopify merchant experience better and more seamless. This creates a sticky ecosystem that merchants find hard to leave.
Merchants subscribe to Shopify plans because of their seamlessness, easy-going nature, and strong partnerships. > Shopify gains economic leverage. > Shopify uses this leverage to reinvest into the platform, grow new partnerships, add new features, and continue improving ease of use, etc. > This in turn, increases sales for all merchants, who benefit from lower costs due to the partnerships (which they can then reinvest in ads, for example, also built into the Shopify ecosystem, growing their sales). This increases GMV, which generates even more revenue for Shopify and attracts more merchants, leading to a consistent carrousel of business growth.
With, I should mention, high margins (20, 30, 40%) occurring during most if not every single aspect of the business along the way. This, is the seemingly simple, but incredible business model of Shopify.
Management quality
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