Shopify Stock: A Pick-and-Shovel Play for Online Shopping

Shopify Stock: A Pick-and-Shovel Play for Online Shopping

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Shoppers on an escalator in a shopping mall.It was a rough holiday season for brick-and-mortar stores. Recent announcements from Sears Holdings, J.C. Penney, Macy’s, and Target Corporation about store closures and dwindling profits have investors concerned about the traditional retail space. Consumers are less inclined to spend their time walking through physical stores and instead continue to migrate to the online shopping experience.

Accenture Consulting’s 2016 Holiday Shopping Survey has an amazing statistic that 84% of U.S. shoppers planned to check Amazon.com Inc. before buying elsewhere. The numbers are similar for the United Kingdom at 80% and France at 70%.

IMAGE SOURCE: PIXABAY.

When I see change, I look for opportunity

Whenever I see a dramatic shift in consumer behavior, as an investor, I look for a displacement of dollars from the old to the new. What the world will look like tomorrow is where I want to place my investment cash.

Captain Obvious would quickly say that Amazon is the company to buy. If I had to make a wager on one company that will be in existence 50 years from now, I would select Amazon. But when I look for a less obvious play that has more room to run and grow its stock price, I find Shopify Inc. (NYSE:SHOP) With a $5.3 billion market cap and a solid business that helps smaller companies sell things online, it’s a way to invest in the migration to online shopping that could provide a lot more punch for your portfolio.

Why I love Shopify

There are three aspects of Shopify that make me feel this is a terrific investment opportunity.

The first is that a large portion of its revenue comes from a sticky subscription business model. When a company or entrepreneur wants to sell online, it typically needs a partner to create the structure around hosting the business online, creating the online storefront, tracking sales and inventory, and in general making everything work.

Shopify provides new businesses the ability to enter the online world with a turnkey product for a subscription fee as low as $29 per month. The more bells and whistles the customer wants, the higher the monthly fee and once a business is online with Shopify, switching to another service becomes a chore.

The second aspect of this business that I really like is that it is asset-light. Unlike Amazon, there are no warehouses to build that require large capital expenditures. The company makes computer code that can be used across its customer base and acts as the middleman around any sort of delivery service it offers its merchants.

Shopify can scale its product to accommodate businesses that start small and grow large. It can also handle more and more merchants across the globe. The subscription solutions business provided the company with 79% gross margin in 2016.

In addition to the subscription fees, merchants are also offered add-on products such as point of sale service, shipping, and cash advances. These additional features are sold under the banner of merchant solutions, and although the gross margin was just 30% for 2016, there is very little sales cost associated with this incremental revenue.

The third point is that the business is in the very early stages, with a long runway of growth ahead of it. Shopify estimates that in the current geographies it serves, there are a total of 11 million businesses that could use its product, and on a worldwide basis, that number balloons to 46 million merchants.

SHOP Chart

SHOP DATA BY YCHARTS.

This company looks like it could produce tremendous returns as its story plays out. There seems to be no turning back the clock and reversing the progress of shopping moving online and if one ignores the day-to-day volatility of the share price caused by the vagaries of the stock market, the underlying business has a tremendous tailwind to ride on.

Frank DiPietro owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool recommends Accenture and Salesforce.com. The Motley Fool has a disclosure policy.

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