Even with their recent pullback, Shopify (SHOP +0.96%) shares have more than doubled in the past year and have been a solid multi-bagger for those who have held them more than a couple of years. Given the incredible gains, some investors might be tempted to sell shares and "lock in" profits. But I'd contend that that's a short-sighted approach. You are likely underestimating this innovative e-commerce platform's ability to continue to grow, and selling today could be detrimental to your portfolio returns.
Let's look at five things you might not know about Shopify that might just persuade you to hold on to your shares.
1. Its rock star CEO didn't want the job
In 2008 co-founder and CEO Scott Lake left Shopify, which left his co-founder and chief programmer, Tobias Lutke, in the role of leading the company. Not wanting the job, he met with Silicon Valley venture capital firms to find someone else to fill the role, but the search was unsuccessful. Angel investor John Phillips finally convinced Lutke to stick with it by saying "Tobi, you will never find anyone who will care about Shopify as much as you do. And so you should just give this a go." Luckily, the reluctant software guru embraced the challenge and by every measure has proven to be a tremendous CEO.
Image source: Getty images.
2. Its customers shape the development roadmap
It might be his programming background, but Lutke has a knack for finding a common-sense approach to even the most challenging problems. One of the many important decisions for a fast-growing software start-up is how to prioritize what new features to launch for customers when it has limited resources. If these critical decisions are made poorly, the company could lose customers or waste valuable resources. For Lutke, his approach boils down to a simple question, "Do do most of our customers need it [the new feature] most of the time?" This clear guideline has enabled the company to deliver the most valuable enhancements for customers over time and resulted in a platform that's both powerful and easy to get started.
3. It's creating its own market
The coronavirus pandemic has created tremendous disruption for small businesses, and one farmer was afraid she'd lose everything as the pandemic left her with no way to sell her crops. But she explained that Shopify's software helped make an incredible difference in her life:
There is interest now in coming to pick up the vegetables on the farm, of which we hope to do pre-sales online. I almost didn't set it up [her online store], because setting up a website is so hard, but Shopify made it so easy. They should really know that they are helping people.
With years of Shopify's platform development efforts, it's easier than ever to help merchants get started. The story of the farmer is just one of many entrepreneurs that now have their own e-commerce store because of Shopify. This ability to create its own market is a powerful long-term growth driver.
4. Its partners make more money than the company
Shopify knows that it can't fulfill its mission "to make e-commerce better for everyone" without help. Since 2009, it has been building a huge partner network of skilled professionals such as website designers, app developers, designers, and even marketers to help merchants. This network has grown along with the company and has shared in its success. In fact, over the last four years, the partner network's revenues have exceeded its revenue.
Data from Shopify presentations and 2019 year in review. Chart by author.
Jay Myers, an executive of a Shopify app-building partner, described this network as the company's "moat" and stated, "It's not the software -- their competitive advantage is the partnerships." Partners play a critical role in this e-commerce platform's long term success.
5. It's not about the financials
Most investors probably missed Shopify's 2017 earnings call, but it was on that call that the CEO shared an important insight into how the company is managed."I just have to say, from a perspective of building a business was we never manage a company against these, sort of, financial ratios or goals."
Lutke went on to share how it constantly focuses on making its product better for merchants and that, "All of these things go on the flywheel, which hopefully will spin faster and faster, faster." The flywheel Lutke is referring to is the accelerating effect that ecosystem improvements have. Merchants are attracted to the platform because it is powerful and easy to use. More customers on the platform enable partners and the company to improve the software even more, which in turn attracts more merchants.
The financials provide what Lutke calls a "check-in that things are going in the right direction", but long term growth for Shopify is powered by its flywheel.
If you're still not convinced...
You can see that this e-commerce platform has a lot going for it that will power growth for years to come, but I'll wrap up with my favorite aspect of Shopify's business model, which Lutke explains in his most recent shareholder letter:
It's fortunate and rare that our business model is in full alignment with our mission. We succeed when our merchants succeed. Our merchants succeed when we make commerce better for everyone-and we've never been more ready to do so.
If you are still interested in selling your shares after reading this, I certainly can't stop you. But, I'm not making that mistake.
