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Why Shopify Can Beat The Market Over the Next 5 Years

Shopify (NYSE: SHOP) has been a big winner during the pandemic as its market cap has ballooned to nearly $200 billion on a surge in demand for online shopping.

But Shopify is making a number of investments (including in its fulfillment network, Shopify Plus, and the Shop mobile app) that set it up well to outperform over the next five years. In this episode of Motley Fool Live recorded on Oct. 7, Fool.com contributor Trevor Jennewine explains why Shopify's strong growth should continue.

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Trevor Jennewine: Then just to touch on the company's financial performance. Just over the last year, revenue is up 85% to 3.9 billion, the company's free cash flow positive, $507 million of free cash flow. I think one of the underrated assets that Shopify has, its got $7.7 billion in cash and equivalents on its balance sheet. That is compared to about $910 million in short or long term debt. The company really has a strong net cash position. That gives it a lot of flexibility to pivot and make investments as growth opportunities arise. That's why I think Shopify has beat the market over the last five years.

They've got the omnichannel commerce platform, a merchant-centric growth strategy, and that helped them gain a strong competitive position in the e-commerce market as a whole. Then obviously there have been industry tailwinds. In 2015, total global e-commerce spend in retail, it was $1.67 trillion. According to e-Marketer, that number grew at about 20 percent per year to reach 4.2 trillion in 2020. Twenty percent compound annual growth rate for e-commerce spend over the last five years. This was supposed to be about 12 percent over the next five years. Why do I think Shopify can beat the market over the next five years? I've listened to some growth opportunities here. The management puts its market opportunity to $153 billion right now. That figure only includes the small and medium sized businesses. At the very end, I'll touch on Shopify Plus, but the company is focusing its growth in three areas.

The Shopify Fulfillment Network is the first one. They're building this out, its a $1 billion investment they made starting in 2019 over a five-year period. Once this is complete, that's going to help Shopify's merchants compete better with larger players like Amazon. Shopify is going to be able to offer managed fulfillment services to its merchants, it's going to use artificial intelligence for demand forecasting, smart inventory allocation, intelligent order routing. That's essentially going to help merchants offload that complexity of picking, packaging and shipping orders. It's going to help streamline that fulfillment process on the merchant side, but it's also going to create a fast and reliable delivery experience on the buyer's side. I think that's really going to add to the company's competitive advantage. Having that fulfillment network across the United States is going to be a big asset.

The company is also, last year, launched their Shop mobile app. This is a tool, they call it a tool for buyer attention. If you haven't used the app, it basically allows you to track orders, you can discover brands, you can make purchases. It gives merchants a way to target potential customers, to target them with marketing. I think that they're investing in that product and they've seen good traction with users. Then they're looking to expand internationally, and just to put some context around that, about 56% of Shopify's merchants are currently in North America, and 50% are in the United States alone. North America, in 2020, accounted for about 70% of revenue, over 70% of revenue. There's plenty of room to grow that figure outside of that and they are investing in other geographies. In the last year, they've brought their point of sale hardware to the UK, Ireland, and Australia. They're seeing strong traction in those international geographies.

Then quickly, I think there are two things that maybe some investors overlook in terms of their importance. Shopify has Shop Pay, they call it their accelerated payments platform. According to management, it is the highest converting payments platform on the Internet, but they're expanding this tool off of their platform. By the end of the year, merchants on Facebook and Google will be able to accept payments through Shop Pay even if they're not Shopify merchants. This reminds me of what MercadoLibre did with Mercado Pago, how they made it available to third party sellers off of the MercadoLibre marketplace. I think that will allow Shopify to tap into the digital payments market more aggressively. If they do see success like MercadoLibre saw, I think it could be a significant growth driver. There are differences between Latin America and Shopify's primary geographies. That's absolutely not guaranteed, but there's potential for growth by expanding that tool off the marketplace.

Then the last thing I want to touch on is Shopify Plus, its a more flexible commerce platform that's designed for larger sellers. There's about over 10,000 brands using Shopify Plus right now. They're actually seeing some traction with some well known businesses, General Electric, McCormick, Nestle, Netflix, and PepsiCo, just to name a few of the companies that are using Shopify Plus as their e-commerce platform. I think for those five reasons, I think Shopify looks like a market beater over the next five years, just like it has been over the past five.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Facebook, MercadoLibre, and Netflix. Trevor Jennewine owns shares of MercadoLibre and Shopify. The Motley Fool owns shares of and recommends Facebook, MercadoLibre, Netflix, and Shopify. The Motley Fool recommends McCormick and Nestle and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.


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