The following segment is excerpted from this fund letter.
During the quarter, as its shares fell to levels we believed to be attractive for longer-term investors, we initiated a position in Shopify Inc. (NYSE: SHOP), the leading cloud-based commerce software platform. Shopify’s value proposition is to provide a single, easy-to-use operating system for merchants to manage all aspects of their business, including selling across multiple channels (direct-to-consumer as well as third-party marketplaces like Amazon ), management of product lists, inventory, orders, payments, shipments, marketing and customer relations. The company has more than 1.5 million merchants, who processed nearly $120 billion in sales in 2020 (and are expected to top $170 billion in 2021), making Shopify the second-largest e-commerce player “in behind the scenes” in the United States behind only Amazon, and ahead of Apple, Walmart and eBay! Shopify has developed a scalable cloud platform that caters to merchants of all sizes, from the new starter entrepreneur to big brands like PepsiCo and Unilever. What we really love about Shopify is the ecosystem the company has built, creating network effects and a virtuous circle that will be very difficult for competitors to overcome. The more merchants join, adopt, and transact on Shopify’s platform, the more partners are drawn to its ecosystem, adding more features and options to the platform (via the Shopify App Store), increasing the moat and the value of the business for merchants.
The big picture here is that Shopify is quietly building a competitor to Amazon. But unlike Amazon, which also competes with its merchants (through direct sales), Shopify is in the background, quietly helping merchants of all sizes sell more online, aggregating the scale of the many merchants including it has, to allow the advantages that only the greatest merchants could obtain in the past. The opportunity for Shopify is twofold. First, it is still early in the adoption curve, with the amount of gross value of commodities traded on the platform expected to surpass $170 billion in 2021 on a $20 trillion+ market opportunity (trade worldwide, excluding China), i.e. less than 1% penetration. Second, as Shopify continues to remove barriers to merchants selling online, the company can increase its share of the economy (or grab rate) by around 2.6% currently (Amazon charges between 10% and 20% on its fulfillment services). Finally, and perhaps most importantly, Shopify has a great culture, and it’s led by a visionary founder, Tobi Lutke. An example of company culture is a blog post from 5 years ago titled “Creating Value – Building for the Next 100 Years” (how many CEOs think, let alone talk about the next 100 years of their business ?). The message begins with the following paragraph: “At Shopify, value creation is measured not only by growth in dollars and cents, but also by small business growth, computer literacy, and personal development. We build for the long term. In our view, Shopify has all the ingredients to become a grassroots holding and we’re excited about its long-term potential.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.