Shopify Is Killing It By Making Businesses Win Online

Shopify ( SHOP ), whose e-commerce software lives in the cloud, is now literally a play on getting high - well, on Canadians in Ontario getting high, to be precise. It's also a play on Tesla ( TSLA ) gear, the Los Angeles Lakers and Beer Nuts.

[ibd-display-video id=3120821 width=50 float=left autostart=true] The reason: Shopify shares in the success of its customers. So the Ottawa-based company has an interest in its government's Ontario Cannabis Retail Corp., which just announced it will join Tesla, the Lakers and Beer Nuts, and more than 600,000 other merchants in 175 countries using Shopify's e-commerce platform.

Even as the likes of Amazon.com ( AMZN ) and Walmart ( WMT ) wage a war over the future of retail - both online and off - Shopify's merchant customers are staking claim to a growing slice of e-commerce activity.

Customers on the Shopify platform for at least a year saw sales rise 20% from a year ago, outstripping e-commerce growth as a whole. The National Retail Federation puts overall U.S. online retail sales growth at 11.5% in 2017 vs. 2016 during the holiday shopping season.

"The more merchants sell, the more payments we facilitate, the more shipping we assist with, the more working capital we provide," Shopify Chief Executive Tobias Lutke said on a recent company earnings call.

$1 Billion In Goods

Collectively, Shopify merchants hit pay dirt this holiday season, grossing more than $1 billion in merchandise sales from Black Friday through Cyber Monday. Peak volume topped $1.14 million in sales per minute, twice the $556,000 apex from a year earlier. For the full fourth quarter, gross merchandise volume grew 65% from a year ago to $9.1 billion.

Shopify's own revenue, which surged 71% from a year ago to $222.8 million, is growing even faster than that of its customers, for two big reasons.

Shopify sprang up in 2006 to democratize the e-commerce opportunity by providing small businesses with a platform that allowed them to set up and manage their online businesses with the most cutting-edge technology at an accessible price. While that's still a huge part of its mission, Shopify has moved upstream to serve large enterprises, which account for a small but growing share of subscription revenue.

Monthly fees for using the Shopify platform range from $29 for small entrepreneurs using the basic package, to upwards of $2,000 for Shopify Plus customers.

The second driver is that Shopify has expanded its range of services and continues to sign up more of its existing customers for add-ons including payment services, financing and shipping.

Revenue from those merchant solutions grew 74% from a year ago to $128.9 million in the fourth quarter, while subscription revenue grew 67% to $93.9 million.

Sales Jumping By 2021

KeyBanc Capital Markets analyst Monika Garg sees Shopify on track to hit $2 billion in revenue by 2021.

Sales generated from merchant solutions should continue to outpace subscriptions during that time, rising to $1.3 billion and $719 million, respectively.

One of Shopify's newer services, Shopify Capital, was launched in April 2016. It advanced $39.7 million cash to qualifying merchants in the fourth quarter vs. $14.7 million in the year-ago quarter.

IBD'S TAKE : Shopify's Computer Software-Enterprise industry group is ranked No. 14 by IBD among 197 industry groups based on stock-price performance and momentum. Within the group, Shopify is ranked No. 11 by IBD Stock Checkup based on earnings, sales, margin and stock-price trends. Visit IBD Stock Checkup to see the leader in each category.

Lutke has made clear that he plans to invest to aggressively go after what it sees as a massive, long-term opportunity, putting growth ahead of profit. Still, Shopify turned a profit in the third quarter and soundly beat estimates in the fourth quarter , earning an adjusted profit of 15 cents a share vs. estimates of a nickel, when it reported on Thursday.

Shopify is "well-positioned to be a 100-year company," Lutke said, because it solves the problem of giving small business "a chance to survive and thrive."

Shopify told analysts on its Thursday earnings call that its 2018 focus will be pushing ahead with its international expansion and investing in its Plus platform catering to enterprise customers and enabling business-to-business commerce.

Shares of Shopify weathered the recent correction, staying around buy range. Shares made a big 9% run-up prior to Thursday's earnings report and gave back 1.6% in afternoon trades Friday.

International Growth

International growth appears to be a prime opportunity judging from Shopify's acceleration in merchant customers in the fourth quarter. Shopify finished with 609,000 customers, up from 375,000 a year ago and 530,000 at the end of the third quarter.

Both analysts and the company itself have difficulty nailing down just how big its market opportunity really is.

KeyBanc's Garg told Investor's Business Daily that Amazon, which bowed out of its Webstore business providing small and midsize retailers with online shops in 2015, had more than 2 million merchants, which offers a hint of the running room ahead of Shopify.

At the time, Amazon suggested Shopify as an alternative platform from which they could still have access to Amazon's sales channel and Amazon's payments system. For both Shopify and its customers, the set-up turned out to offer advantages.

"Shopify wants to give their sellers access to every possible channel," Wedbush analyst Aaron Turner told IBD.

More Selling Venues

In 2017, Shopify added Facebook's ( FB ) Instagram, global fashion search engine Lyst, BuzzFeed and eBay (EBAY) to its list of selling venues that its merchants can access without the complexity of multiple sites for tracking inventories and orders. It already had Facebook, Pinterest and Amazon in that camp.

"Two years ago, less than half of our merchants were using more than one channel to sell. And this past quarter, that number is closer to 60%," Harley Finkelstein, Shopify's chief operating officer, said on Thursday's conference call.

He highlighted the 61% of fourth-quarter transactions placed via mobile device, nearly twice industry-wide estimates, as evidence that "Shopify is best positioned to help merchants meet these new consumer shopping habits and trends."

Analysts see Shopify as being on the cutting edge of technology, citing its in-app Augmented Reality feature, which the company built using the Apple (AAPL) ARKit for Magnolia Market, the home and lifestyle brand HGTV Fixer Upper hosts, allowing customers to see on their iPhones how items will look on display in their homes.

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Shopify won't just provide an e-commerce platform for Ontario's legalized cannabis business, it will provide in-store point-of-sale systems and credit card readers to process transactions at an initially planned 40 outlets.

The cannabis deal might add $3 billion to the gross merchandise value processed via the Shopify platform. KeyBanc's Garg has estimated that Shopify's merchandise transactions will balloon to $87.5 billion in 2021, up from $26.3 billion last year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.