Is Shopify a buy now?

Shopify Inc.’s stock is down more than 50% since its November high. For the most part, the tumble was triggered not by company-specific variables but by a stratospheric valuation colliding with macro factors, the latter being the prospect of higher interest rates and a winding down of the COVID-19 pandemic.

I believe the much better valuation for Shopify’s stock presents a buying opportunity for long-term investors. Why so?

As Hemant Taneja discusses in his book, Unscaled, companies in many sectors no longer need size to compete. In the old days, large companies could outspend small companies on advanced technologies, sophisticated logistics, efficient distribution and other inputs to gain an edge. But now small firms can access such inputs by renting them from cloud-based e-commerce platforms like the one built by the leader in the niche: Shopify.

Wal Mart may still be able to take away market share by opening giant warehouse stores in towns and neighbourhoods to put most of the local retailers out of business but nowadays, Shopify is helping small enterprises to win back market share from the giants. With e-commerce claiming close to 15% of retail sales in North America, this trend has a long way to go – especially for Shopify, which currently has the second largest share of the North American market (behind Amazon.com). E-commerce in China already claims at least 25% of retail sales.

Furthermore, an extra subscriber does not add materially to Shopify’s cost but it does provide a stream of monthly payments that can be invested into increasing the scale and quantity of tools on the Shopify platform, thus further enhancing the competitive position of smaller firms. In short, as the number of subscribers increases on the platform, so does its aggregate scale and competitive position.

“Shopify’s platform is like an operating system for retailers,” notes investment manager Gary Robinson in his article, Scale as a Service. Operating systems are what gave technology giants such as Microsoft Corp. their ability to generate substantial value for its customers and thus be able to defend its market position for long periods of time. While Microsoft’s operating system itself may not have been the best on the market, it gained unparalleled value as more and more third-party apps and software products were added to it. The same could be said of Shopify as a first mover in e-commerce platforms for entrepreneurs: the more entrepreneurs set up on its platform the more it gains in value and in competitive position.

Robinson continues: “Shopify … provides merchants with the tools they need to manage their business across a range of retail channels. Through the platform they can build online stores, run digital marketing campaigns, accept payments, manage inventory, and borrow money. All an aspiring merchant really needs to get going with Shopify is a smartphone and a good idea.”