It’s Time To Admit That The Formula Works As Shopify Stock Nearly Doubles

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Shopify (NYSE:SHOP) doesn’t lack its fair share of doubters. A little more than 7% of the outstanding shares of Shopify stock are held as short positions … arguably the riskiest of all stock-based speculations, as the potential loss is theoretically an infinite one. A handful of contentious stocks are marred by higher short ratios, but most aren’t.

It's Time To Admit That The Formula Works As Shopify Stock Almost Doubles

SHOP stock has gained almost 88% year to date versus just shy of 19% for the Nasdaq Composite index. As of Friday, the Shopify market cap stands at $28.9 billion.

Those short-sellers have an understandable basis for their doubts, too. The whole “help people open an online store” thing has been tried plenty before, usually resulting in lackluster results. Shopify’s product doesn’t look terribly different than services offered by Squirrelcart and LemonStand, both of which ultimately failed. Not even the venerable Facebook (NASDAQ:FB) was able to make its e-commerce dreams a reality, unable to stand up to the overwhelming presence of Amazon (NASDAQ:AMZN).

Yet, somehow Shopify’s formula works, even if it’s not readily clear why.

Choose Your Store Type

“What Shopify really is, is we’re this retail operating system,” COO Harley Finkelstein said in a post-earnings interview with Jim Cramer on April 30. He went on to explain “You can come with us and build an online store, but you can also use our products on a brick-and-mortar store. You can cross-sell on Instagram, or Facebook, or Amazon, or eBay or anywhere, but it all feeds back into one simple and centralized back office.”

Shopify’s platform allows entrepreneurs of all sizes to establish online shops that turn business ideas into a reality, but also stores with a physical presence. It’s complex, yet simultaneously simple.

It’s also not exactly a novel concept, though Shopify does it better than any other player has been able to. Last quarter’s revenue growth came in at just under 50%, while earnings per share of Shopify stock more than doubled. The big quarter merely extended a lengthy streak of double-digit growth of its top and bottom lines.

Still, it’s not the way it should be given the business model’s pass struggles, begging one question from investors that are mulling or have taken a plunge into SHOP stock: Are CEO Finkelstein and his team truly this good at what they do?

They are.

Better Than the Rest

The secret of the company’s success isn’t exactly a secret. In a recent interview with industry news and research outfit Ad Exchanger, Shopify’s director of product Michael Perry explained “We remove the complexity to help get products out there as quickly and easily as possible. We have an ecosystem with thousands of apps that helps our merchants with marketing. Part of the strength of Shopify is that ecosystem.”

The explanation understates how robust Shopify’s platform is, though Perry’s comment underscores an idea Finkelstein articulated in that CNBC post-earnings interview. “If you think about it, if you aggregate all those [820,000] merchants … we’re actually the third-largest online retailer in the United States,” he said. The reason that’s important is, we’re able to take those incredible economies of scale … and we’re able to trickle them down to entrepreneurs.”

That ability to provide the benefits of scale is a microcosm of the underlying philosophy that’s helped differentiate Shopify from alternatives. The company intentionally puts its client companies first in a way that truly lets them build a business, which is where most predecessors have failed.

Actual Business Building

“The most important thing for entrepreneurs is to establish that direct relationship with their customers,” Perry said, adding “Personally, I don’t know why anyone would want someone else to own their customer relationship. Unfortunately, that’s the exchange that takes place with a digital marketplace.”

Finkelstein adds color to the idea, explaining “When you go to a big marketplace (such as Amazon) you rent customers from that marketplace. When you build your own online store, your own physical store, you own the entire customer relationship. That customer is your customer. You can remarket to them.”

To that end, Shopify is upping the ante, respecting the fact that many of its merchants also operate in the brick-and-mortar world. Already offering point-of-sale hardware, last month the company unveiled three new POS devices — The Shopify Tap & Chip Reader, Dock, and Retail Stand.

It’s all part of a bigger, well-thought-out comprehensive solution, however, integrating multiple solutions that let small business owner focus on building a business rather than managing technology.

Bottom Line on Shopify Stock

In retrospect, the advent of a true, customer-centric and complete turn-key solution for aspiring entrepreneurs was inevitable. The industry had been getting closer to the right answer; Wix.com (NASDAQ:WIX) is a respectable rival Shopify should keep an eye on. There’s little doubt, though, that Shopify has finally found the precise pulse of what online entrepreneurs are truly looking for.

Better still, it’s going to be tough for a competitor to replicate Shopify for the same reason it’s difficult to describe its edge.

That in itself bolsters the bullish case for Shopify stock.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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