With stocks down more than 45% from highs, Shopify (NYSE: SHOP) has certainly been underperforming recently. However, in this Motley Fool live Video clip, recorded on January 27Fool.com contributor Jason Hall explains why this might be worth a closer look for patient, long-term investors.
Jason Hall: I’ve been doing a lot more research on Shopify lately, and you’d think of Shopify as this e-commerce company, and that’s their core business. But what Shopify has done that has made it so dominant and really charts its course is that it’s become a hub for all the diverse and varied services businesses need for their online presence, e-commerce presence for their omnichannel platform. You are thinking of a bakery that wants to create a website for customers to order online.
Everyone does that now. It’s like you have to do that to be competitive. If not, I guarantee the other baker across town does. So you set up that e-commerce presence and you have the ability to place orders. So you need to link it to your inventory. When you update your inventory in your store, it should update what’s online. Why not link your in-store merchant solutions to your online merchant solutions? Think about payments and that sort of thing. You want to expand.
Who will you go to for your loan, for the capital, if you need an advance? Guess what? Shopify knows so much about its customers. Tobias Lütke and his team saw so many opportunities to be more than just the company you go to to build your e-commerce platform and have a button to press to buy. I will share a link of their Q3 presentation here. We should see the fourth quarter, I think it will come out in the next two weeks or so. But here are a few areas where Shopify has really grown.
Shopify payments, gross payment volume, grew by 46% in the third quarter and GMV penetration rate was 49%, which means how much it is used by its merchants or customers. Traders, on the other hand, use its platform. Then you have Shopify capital, which grew by 56%. This is a relatively new thing that the company has been doing for the past two years, where it lends to its merchants. Cash advances and also loans.
You think on the surface, why is Shopify taking this kind of risk? Now he obviously uses financial partners for all of this to ensure he meets regulatory requirements. But we’re talking about companies that have a data advantage. We are talking about Facebookwe are talking about Alphabet, Applethese companies that hold this huge amount of data about their users.
Shopify is in the same position with its merchants. They understand their revenue growth. They understand the products they sell. They know the margin profiles of the products their merchants sell. Honestly, it gives them insight into how profitable these businesses are, better than a lot of lenders, in terms of knowing that information very quickly and being able to act on it, and that’s so powerful for Shopify. What it also does is make its platform much stickier.
It’s one thing if you’re using someone to build a website and want to switch providers. But let’s say you use this company to build your website and you also use it for your merchant solutions, and you also add Shop Pay, which is there as a one-click thing that, let’s say I’m a buyer, I ‘I’m a customer and I’ve set up Shop Pay. Once I put in the credit or debit card or whatever I want to use. I put my delivery address, there is my name and all this information. I go to a website and find something I want to buy and see Shop Pay there, I click on it. I don’t have to give this merchant my credit card number. I don’t need to put my address. All of this continues.
It’s transparent to the user, and the network effect of that, $37 billion since the inception of Shop Pay in 2017, $37 billion in gross merchandise volume. All of these things create network effects and build stickiness with users, merchants, as it becomes a more integrated part of their business. If you use Shopify for your merchant solutions on your website and in your retail stores, it’s not easy to replace. If you want to leave Shopify, you might need three, four or five vendor solutions that you need to put together to replace Shopify. Increasingly, financial services will occupy a larger and more prominent place in this process.
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