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3 Reasons Shopify's Growth Is Here to Stay

By Matthew Cochrane - Updated Apr 17, 2019 at 1:56PM

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Shopify hopes that a budding Canadian cannabis market, augmented reality, and brick-and-mortar locations will keep its growth thriving for years to come.

One of the most successful stock investments over the past three years has been Shopify (SHOP -2.55%), the cloud-based, omnichannel commerce platform that small businesses turn to for help setting up their online store fronts. When the company reported its full-year and fourth-quarter results last month, investors were given even more reason to cheer. Total revenue rose to $344 million as gross merchandise volume (GMV), the total amount of goods sold by sellers across Shopify's platform, grew to $14 billion, both 54% increases year over year. 

As Shopify grows a robust ecosystem, allowing merchants to address all their logistics, payments, and marketing needs, it becomes progressively more difficult for sellers to leave the platform. In other words, once customers are acquired, they will stay as long as Shopify remains in business, meaning it will continue to collect monthly recurring revenue streams.

Check out the latest earnings call transcript for Shopify.

A sign reading "Shopify" with the company's logo next to it, on the outside of its new Los Angeles location.

Shopify opened its first physical store in Los Angeles, where merchants can listen to guest entrepreneurs speak and take classes on practical subjects such as marketing and product photography. Image source: Shopify.

Explosive growth rates and an attractive business model are usually reasons enough to buy shares. For investors still on the fence, however, here are three more catalysts the company is exploring according to its most recent conference call transcript: permanent physical Shopify locations, the use of augmented reality for retail applications, and becoming an industry expert at selling cannabis products online.

A permanent physical presence

In the fourth quarter of 2018, Shopify opened its first physical store in Los Angeles. The location is outfitted with a makeshift amphitheater where Shopify merchants can come and listen to guest speakers and experts give classes on product photography and organic marketing techniques, among others. The location also features a "Creation Zone," where partners take turns -- each lasting a quarter -- working with entrepreneurs on product development.  

The location was chosen based on Shopify's merchant data. During the conference call, management stated there were 10,000 Shopify merchants in the Los Angeles area alone and 80,000 in California. Among the merchants in L.A. were 400 who had earned more than $1 million in GMV. Using this same data, Shopify can judiciously open more locations in geographic areas where clusters of its merchants exist, helping the sellers on its platform succeed. 

The stores might also act as a customer acquisition method. During Shop Class, a touring class that Shopify put on in 2017, over 20% of attendees opened their first store.

A reality-altering shopping experience

Shopify is also experimenting with augmented reality shopping experiences, a trend management believes will not have a strong impact on the near term, but will one day pay big dividends. In the conference call, CEO Tobias Lutke stated:

We have prepared the platform for [augmented reality], as you can go to a number of Shopify stores and sort of seize a little bit early fruits of that labor. You can look at couches ... you might want to buy in your web browser on Shopify stores. And then instead of looking at pictures, you can actually place them in your living room and see if they actually fit dimension-wise, all these kind of things, which is really, really cool. But there is such an enormous amount of work that has to happen to get proper 3D models for -- of all the products, figure out how to permanently place objects in the real world.

Lutke said developing these technologies for small merchants was one of the primary motivating factors for Shopify when it was first founded. He noted that in the past, small businesses had a hard time keeping up with larger corporations as new technologies became available.

Shopify reaches new highs

In the Q4 conference call, Shopify also noted that it had entered a new retail vertical, the Canadian cannabis industry. While this particular market is not necessarily huge, COO Harley Finkelstein believes it establishes Shopify as a trusted partner for future markets where cannabis might be legalized.

This is especially true, Finkelstein says, due to the stringent legal requirements that were put in place by the Canadian government, such as age verification and ensuring all sellers are properly licensed. While offering a compliance-ready platform for cannabis sellers in Canada gives Shopify an opportunity to boost sales in the immediate future, Finkelstein noted that "really the Canadian cannabis push was really not only just to get a foothold in the Canadian market, but also ensure that we have a really good position in globally as things begin to decriminalize."

The icing on the cake

Shopify remains the go-to e-commerce solution for aspiring entrepreneurs and small businesses looking to set up their online storefronts. As long as e-commerce remains a growing market, and there are currently no signs of it slowing down, Shopify should not have any problems showing consistent growth. That the company can show such explosive growth is a testament to its sticky ecosystem and the slew of innovative solutions it continues to release that solve major pain points for small merchants. The above three catalysts are just the icing on the cake, proof that the company continues to find more levers to pull to drive growth, both in the immediate and long-term future.

Matthew Cochrane owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.

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