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Shopify Hit an Important Tipping Point Last Quarter. Investors Should Be Celebrating.

By Danny Vena - Jan 28, 2021 at 9:00AM

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As this software-as-a-service company scales its cloud-based platform, leverage kicks in.

Investors are no stranger to Shopify (SHOP -10.57%), as the company has become the flag-bearer for the benefits of digital retail. In the less than six years since Shopify went public, the company has grown into an e-commerce dynamo, and it recently surpassed an important milestone that investors will be watching closely.

On this episode of Fool Live that aired on Nov. 30, 2020, contributor Danny Vena discusses the importance of this development and what it means for the future.

Danny Vena: Shopify will eventually be consistently profitable. That might be something investors would scratch their head at. You would hope that would be a foregone conclusion.

One of the things about, particularly with cloud-based companies, software-as-a-service, platform-as-a-service, infrastructure-as-a-service companies, in the beginning of their lives, they have to build out this massive infrastructure online, where they can conduct business. So of course, for the five-years that Shopify has been in business, they have not been consistently profitable.

But the important thing to remember, and I like to use software-as-a-service as the example. All of the time when we're talking about cloud-based companies is because once you have this built out, once you have invested all of the money that you need to -- and granted, there's going to be a period of years where you have to overtime consistently do research in development, improve your product, expand your marketplace -- but once you have the majority of your system in place, every time that you add another customer to that, the majority of revenue from that customer drops to the bottom line, and if not totally, at least a majority of it becomes pure profit.

Now, I'm going to switch here for just a moment and share my screen with you to share Shopify's most recent quarterly results from Q3'20. You'll note that I've highlighted the part that said, "Net income for the third quarter was a $191 million compared with a loss of $72.8 million in the year-ago quarter." Even just a year-ago, Shopify was not profitable.

However, the fact that Shopify is going to be able to leverage their existing platform, and the more merchants that join that platform, the more that existing merchants expand their business on that platform, the easier it's going to be going forward for Shopify to be profitable.

Once it becomes consistently profitable, which I don't believe is too far off into the future, what we're going to see is we're going to see an explosion of profitability. That the profits from there are going to skyrocket primarily because, as I said, when you add new merchants to the platform, most of that revenue falls to the bottom line, and so their profits go from good, to great, to fabulous.

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