Investment Memo: Shopify (SHOP)

1. Executive Summary

Shopify is not just an e-commerce platform; it's an integrated commerce operating system that enables businesses of all sizes to sell anywhere. Our thesis, "Scale as a Service," is predicated on the idea that Shopify's value proposition extends far beyond simple online store creation. The company provides a comprehensive suite of tools for marketing, payments, shipping, and customer engagement, allowing merchants to scale their operations seamlessly from a nascent idea to a global enterprise. The market currently undervalues Shopify, viewing it as a high-beta play on e-commerce growth. We believe this view is myopic and fails to appreciate the company's deeply embedded position within the modern retail landscape. The catalyst for a re-rating will be the continued growth of their merchant base, the expansion of their Gross Merchandise Volume (GMV), and the increasing adoption of their high-margin merchant solutions.

2. The Scoreboard

3. Business Overview

Shopify makes money from two primary sources: Subscription Solutions and Merchant Solutions. Subscription Solutions are the recurring fees merchants pay for access to the Shopify platform. Merchant Solutions are the value-added services that Shopify offers to help merchants grow their businesses. These include Shopify Payments, Shopify Shipping, and Shopify Capital. The revenue split is approximately 30% Subscription Solutions and 70% Merchant Solutions. Geographically, North America represents the largest market, accounting for roughly 60% of revenue, with Europe and Asia-Pacific making up the remainder.

The Moat (Competitive Advantage)

Rating: Wide Source: Switching Costs / Network Effect

Shopify's moat is wide and deep. The switching costs for a merchant are substantial. Once a business has built its online presence on Shopify, integrated its payment processing, and established its shipping and fulfillment workflows, the prospect of migrating to a new platform is daunting. This creates a sticky customer base and a predictable stream of recurring revenue. Furthermore, Shopify benefits from a powerful network effect. As more merchants join the platform, it attracts more developers to build apps for the Shopify App Store. This, in turn, makes the platform more valuable for merchants, creating a virtuous cycle.

While competitors like Salesforce are making significant investments in AI, with a $500 million venture fund dedicated to the space, their focus is on a broader CRM platform. Shopify's moat is not directly threatened by this, as their core competency remains in providing a seamlessly integrated commerce operating system.

4. The Investment Thesis

Our "Scale as a Service" thesis is built on three pillars:

Point 1: Democratizing Commerce

Shopify has leveled the playing field for small and medium-sized businesses (SMBs). Historically, starting a retail business required significant upfront investment in brick-and-mortar stores, inventory, and marketing. Shopify has abstracted away much of this complexity, allowing entrepreneurs to launch a business with little more than a laptop and an idea. This has unlocked a massive long-tail of merchants that were previously underserved by traditional retail infrastructure.

Point 2: The Flywheel of Merchant Solutions

The genius of Shopify's business model is the symbiotic relationship between its Subscription and Merchant Solutions. The subscription offering gets merchants in the door, but the real magic happens when they start using Shopify's value-added services. Shopify Payments, for example, is a seamlessly integrated payment processor that simplifies the checkout process for both merchants and customers. Shopify takes a small percentage of each transaction, creating a revenue stream that scales directly with the success of its merchants.

Variant Perception (The "Edge")

The market's consensus view is that Shopify is a "one-trick pony" that is overly reliant on the growth of e-commerce. While it's true that Shopify has benefited from the secular shift to online shopping, we believe this view fails to appreciate the company's evolution into a true commerce operating system. Shopify is not just a tool for selling online; it's a platform for managing every aspect of a modern retail business. This includes everything from inventory management and marketing automation to customer support and financing.

The competitive threat from companies like Salesforce, with its extensive AI capabilities, is often misconstrued. Salesforce is building a powerful, general-purpose AI platform for CRM. Shopify, on the other hand, is developing a highly specialized AI for commerce. This is a critical distinction. While Salesforce's AI can help a business manage its customer relationships, Shopify's AI can help a merchant optimize its pricing, inventory, and marketing for a specific product in a specific market.

Consensus View:

Our View:

5. Financial Deep Dive

Shopify's financial performance has been nothing short of stellar. The company has consistently delivered high-double-digit revenue growth, and its margins have been steadily expanding. The key to this success has been the rapid adoption of its Merchant Solutions. As more merchants use Shopify Payments, Shopify Shipping, and Shopify Capital, the company's revenue becomes more diversified and its margins improve.

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• Revenue Quality: A significant portion of Shopify's revenue is recurring, which provides a high degree of visibility and predictability.
• Unit Economics: The lifetime value (LTV) of a Shopify merchant is many multiples of the customer acquisition cost (CAC). This is a testament to the stickiness of the platform and the company's ability to upsell merchants on its value-added services.
• Capital Allocation: Shopify has a strong track record of re-investing its cash flow back into the business to drive growth. The company has also been opportunistic in making strategic acquisitions, such as its recent purchase of a leading logistics provider.

6. Valuation

Methodology: DCF Fair Value Estimate: $150

Our discounted cash flow (DCF) analysis suggests a fair value of $150 per share, which represents a 100% upside from the current price. Our model assumes a 20% compound annual growth rate (CAGR) for revenue over the next five years, and a terminal growth rate of 4%. We believe these assumptions are conservative, given the company's massive addressable market and its strong competitive position.

7. Pre-Mortem (Risks)

1. Competition: The e-commerce market is highly competitive. Shopify faces competition from a variety of players, including large technology companies like Amazon and smaller, venture-backed startups.
2. Macroeconomic Headwinds: A slowdown in consumer spending could have a negative impact on Shopify's growth.
3. Regulatory Scrutiny: As Shopify becomes a more dominant player in the e-commerce market, it could face increased regulatory scrutiny.

8. Conclusion & Action

Shopify is a generational company that is still in the early innings of its growth story. The market is currently focused on the near-term headwinds facing the e-commerce sector, and is failing to appreciate the long-term potential of Shopify's platform. We believe this is a classic case of Mr. Market being myopic, and we are confident that our "Scale as a Service" thesis will play out over the long run. We recommend accumulating a position at current levels.

Sources

• https://www.salesforce.com/artificial-intelligence/
• https://www.salesforce.com/news/stories/generative-ai-investing/