What happened

Shares of Shopify (SHOP -3.41%) surged 177.6% in 2020, according to data provided by S&P Global Market Intelligence.

The e-commerce company's stock has risen more than tenfold since the start of 2018, and the business continues to demonstrate strong growth.

A woman preparing a parcel and smiling while looking at her laptop

Image source: Getty images.

So what

The COVID-19 pandemic has accelerated the shift to digital commerce and online payments, resulting in Shopify reporting strong financial results for its latest quarter. As an unprecedented number of people lost their jobs due to the severe economic disruption wreaked by the crisis, more have turned to setting up online shops to sell goods and services from the comfort of their own homes. Revenue for the first nine months rose 82% year over year to $1.95 billion, driven principally by a more than doubling of merchant revenue to $1.32 billion.

The number of merchants on Shopify's platform continued to rise, creating a strong network effect that facilitates higher transaction volumes. Gross merchandise volume surged by 93.6% year over year to $78.4 billion, while monthly recurring revenue, a measure of the average monthly subscription revenue flowing into the company, rose by nearly 50% year over year to $74.4 million. Shopify continues to expand its partner ecosystem as 37,400 partners referred a merchant to the company in the last 12 months ended Sept. 30, 2020, sharply higher than the 23,000 in the previous 12 months.

Now what

Shopify recently introduced Shop Pay installments, a "buy now, pay later" offering that has become increasingly popular with younger shoppers. The plan allows merchants to offer their customers more flexibility with their finances and increases the range of payment options available for use, leading to increased purchase frequency and larger basket sizes.

But there's a dark side to the company's success. E-commerce authentication service Fakespot reported that nearly one-fifth of Shopify's stores were related to fraudulent activity such as counterfeit issues and brand infringements. Slightly more than one-quarter were alleged "scam stores." To its credit, Shopify says it has terminated thousands of such accounts and has implemented new measures to address fraud and other problems relating to its burgeoning merchant growth.

The company should continue to enjoy healthy gains in merchant sign-ups as the pandemic continues to push more people to start online businesses.