February 13, 2020

Breakingviews: Shopify lives high life as e-tailing shovel seller

by Breakingviews.

Unknown brands on Instagram isn’t an emo band, it’s one reason why software firm Shopify is worth some $65 billion. The Canadian company got there by dominating the market for building and servicing online shops for entrepreneurs, many of whom make a living marrying cheap Asian goods with western marketing skills and audiences. It’s a hot combination that can run far. With Shopify’s stock trading at 31 times estimated revenue, it’ll have to.

Tobias Lütke, who runs the firm, co-founded it in 2004 after being disappointed with the software then available when he tried to sell snowboards online. Shopify’s tools for setting up websites, payments, managing shipping and other services has a reputation for being relatively painless. And the firm’s online store allows it to distribute apps and services such as photography or ad creation and collect tolls. Fourth-quarter growth, unveiled on Wednesday, has slowed somewhat from the 72% annual growth rate of recent years, but at 47% compared with the final three months of 2018, is still booming.

Those results drove shares up as much as 20% in early trading, leaving them more than 30 times higher than its 2015 stock-market debut. Perhaps Shopify can keep tapping the urge of people who want to start online shops – it has been surprisingly successful, with over 1 million customers. Easier setup should encourage more to do so, especially overseas.

Formidable competition may be looming, though. Amazon.com is voracious and its trove of user data and warehouses could prove dangerous.

While the valuation looks increasingly daft, Lütke’s response has been levelheaded. Shopify covers most of its capital expenditure from operations. And it has amassed a war chest of nearly $2 billion in cash in part by judiciously selling more stock as the share price rose. That may be useful for picking up rivals or investing in the business if investor ardor for software firms fades.

Lütke has already pledged to spend $1 billion on fulfillment over the next five years, which should help in any battle with Amazon. Taking on a giant firm in a capital-intensive manner may sound foolish, but it might win over merchants worried that Amazon will sell its own version of a hit item and bury rivals in search results. That may help explain shareholders’ ardor for e-tailing’s leading shovel seller.

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