Shopify: The E-Commerce Solution

| About: Shopify (SHOP)

Summary

E-commerce is a rapidly growing business.

This winner-takes-all industry is consolidating.

Shopify is well positioned in the e-commerce space.

The digital revolution and the share economy are turning us all into entrepreneurs.* In the new economy, entrepreneurs will be the norm, not the exception.

While our fathers typically worked their whole lives for the same company, my generation, the Baby Boomers, cut the bond between corporations and their employees. Life-long loyalty to an organization was replaced with loyalty to one's own career. This required mobility and a mercenary approach to employment opportunities.

The next generation is going a step further. The millennials will be more in control of their professional lives than any generation in modern history. The digital economy is offering so many ways to create an income that a nine-to-five job and a tedious daily commute is starting to look like an oddity. Already, many millennials are choosing to be independent workers in the Uber economy, supplementing their regular income by monetizing their homes through AirBnB. But even if these activities generate sufficient income, most will want to start some business online in their spare time.

It is so easy to launch a small company with global reach on the internet. Very little capital and no manpower is required, increasing the likelihood of a successful launch, even if the start-up phase takes a while. All the required services can be bought on line. From web design to payment facilities, from accounting to marketing services, it is all available for a fee. Better yet, small entrepreneurs now have access to all-in-one e-commerce solutions.

One-stop shopping for entrepreneurs is a rapidly growing industry with a few big players emerging. They include Bigcommerce, Volusion and Shopify (NYSE:SHOP), each offering a large panoply of services. Start-ups can get a customized look of their store, integrated payments, an easy way to add and remove products, good analytics, customer support, etc. The largest of them all, Shopify, also excels at using Search Engine Optimization and offers a large choice of apps.

Consolidation of the E-Commerce Solution Industry.

With internet services - search, social, shopping - becoming winner-takes-all businesses, this is a good time to take a look at SHOP. This Canadian company is the largest player catering to the rapidly growing world of do-it-yourself business creation. It claims 243,000 customers. Sales last year doubled and for 2016 SHOP surprised on the upside with projections well above the Street's. That's not all. Powering up in the race for dominance, Shopify continues to aggressively invest the totality of its earnings to consolidate its front-runner position.

This strategy seems to be working. SHOP is clearly crowding out would-be competitors in the e-commerce solution space. Last summer, shortly after eBay (NASDAQ:EBAY) abandoned its Magento Go and ProStore subsidiaries, Amazon (NASDAQ:AMZN) announced that they too were closing down their struggling Webstore, advising third-party sellers to migrate to Shopify. One can hardly come up with a better endorsement than that.

A Growth Industry

E-commerce is still a young industry. It has many years of rapid growth ahead as it rides the wave of "entrepreneurialization" of the economy. Furthermore, this business appears recession proof. Demand for e-commerce services actually tend to go up in economic downturns as laid-off people look for alternative ways to make a living. This explains Shopify's very good performance after the financial crisis of 2008.

Today, users are demanding more and more from e-commerce platforms, narrowing the field. It is no longer enough to offer an easy setup, some level of customization and standard features. Even small online store businesses now have a long list of fundamental requirements including mobile friendliness, social media integration, good user experience, search engine optimization, modules for content marketing and customer support.

Medium-sized companies need even more complex services such as blogging platforms, inventory management, return management and shipment tracking. They also require software for offering coupons and promotions or need a multilingual website with multiple currency options. Integrating a product with Amazon or any social media may be standard practice, but larger companies may want to have the option to buy programatic advertising. Every business should have an email dedicated to support, but bigger ones may need Live Chat.

Shopify offers the whole range of services. Through their Shopify Plus software they now sell to larger companies, including subsidiaries of the likes of GE and Anheuser Bush Inbev, or big brands like The Ellen DeGeneris Show. This level of sophistication and complexity makes it increasingly difficult for new entrants to challenge them.

Valuation.

Companies at this stage of their growth need to be valued on a multiple of their top line, not their bottom line. It is not that this business cannot be profitable, but rather that it would be a mistake to make profits. If they don't put all their profits back into the business in order to grow faster than their competition, they risk losing their front-runner status and rapidly become obsolete. Hence an EV to sales of 6 seems a reasonable price to pay for promising future earnings.

(*see my previous article here).

Disclosure: I am/we are long SHOP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.