In Wall Street’s Best Investments, I recently featured Shopify (SHOP or SHOP.TO), a tech stock idea contributed by Patrick McKeough, editor of Stock Pickers Digest. Shopify is an online shopping site that’s seeing exponential growth. Online sales last year are estimated at $53 billion—about 62% of total retail sales. Overall, e-commerce sales grew 17% last year, with Amazon’s rising 27.2% to $43.96 billion, according to Kantar Retail for Stores—outpacing all of its competitors combined!
The National Retail Federation predicts that non-store sales will grow 8% to 12% in 2017, compared with a projected 3.7% to 4.2% growth rate for the retail industry (excluding automobiles, gas stations and restaurants).
Of course, this expansion is taking place at the expense of the bricks-and-mortar retail industry, which seems almost daily to suffer another blow. Just in the past few months, many major retailers have announced mega store closings, including:
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- JC Penney, 138 stores
- RadioShack, 200 stores
- The Limited, all 250 stores, and shut down its online site
- Macy’s, 130 stores
- Kmart, 102 stores
- Sears, 42 stores
- HH Gregg, 88 stores
- American Apparel, all of its 110 stores
- Abercrombie & Fitch, 60 stores
- Wet Seal, all of its 171 stores
And, as you can see from the following chart, online sales are taking up the slack, with the best growth yet to come.
And that’s great news for Shopify, not to mention anyone who owns shares in this burgeoning tech stock. The company allows businesses and individuals to create online stores, using a series of plugins and themes. Shopify then hosts the online stores, providing payment processing, design and other management services.
As Mr. McKeough notes,
“Shopify’s software allows its merchants to set up both permanent and temporary retail and stores and also web, mobile and social-media platforms. The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.
“The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.”
“For its September 30, 2016 quarter, Shopify saw its revenues grow by 88.6%, to $130 million and its losses shrink to $1.8 million, or $0.02 a share, from $2.4 million, or $0.03. At the end of the period. the company had cash of $400.3 million, or $5.00 a share and no long-term debt.
“Its high spending on research (20% of its revenue, or $19.5 million in the latest quarter) makes it appear less profitable than it really is, but helps it stay ahead of changes in the industry. For example, it has launched a mobile app that lets a merchant set up and run an entire business from a mobile phone.
“The company’s software integrates easily with major online retail sites such as Amazon.com and Apple.”
In the third quarter, Shopify had 325,000 clients in 150 countries, including Procter & Gamble (PG), Tesla Motors (TSLA), Budweiser and Google (GOOG). That figure grew to 375,000 in the fourth quarter, significantly higher than the 243,000 in the fourth quarter of 2015.
And fourth-quarter revenue continued the upward trend, rising 86% from the previous year, to $130.4 million, with subscription sales up 63% to $56.4 million. And net losses declined to $0.4 million, down from $1.1 million in the fourth quarter of 2015.
This year, the company anticipates revenues from $580 million to $600 million and adjusted operating losses from $18 million to $22 million.
As Mr. McKeough notes, the Shopify platform is well designed for use on mobile devices such as phones and tablets. And with the recent announcement that Shopify would be partnering with Amazon (AMZN) in the payments business, it looks like ‘full steam ahead’ for the company. Further, Shopify estimates that there are 46 million entrepreneurs that want to run their own online stores. That’s a huge amount of potential, making SHOP an interest tech stock candidate.
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