With shares down by more than 45% from the highs, Shopify (SHOP 1.01%) has certainly been an underperformer recently. However, in this Motley Fool Live video clip, recorded on Jan. 27, Fool.com contributor Jason Hall discusses why it could be worth a closer look for patient, long-term investors.
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Jason Hall: I've been researching Shopify a lot more lately, and you would think of Shopify as this e-commerce company, and that's their core business. But what Shopify has done that has made it so dominant and really plots its path forward, is it's become a platform of all of the various and sundry services that companies need for their online presence, their e-commerce presence for their omnichannel platform. You think about a bakery that wants to put up a website so the customers can order online.
Everybody does that now. It's like you have to do that to be competitive. If you're not, I guarantee that the other baker on the other side of town is doing it. So, you put up that e-commerce presence and you have the ability to make orders. So, you need to tie it into your inventory. When you update your inventory in your store, it needs to update what's online. Why not have your merchant solutions that are inside your store tied to your merchant solutions that are online? Think about payments and that kind of thing. You want to expand.
Who are you going to go to for your lending, for capital, if you needed an advance? Guess what? Shopify knows so much about its customers. Tobias Lütke and his team have seen so much opportunity to be more than just the company you go to to build your e-commerce platform and have a button to press on to buy. I'm going to share a link here from their third-quarter presentation. We should see fourth quarter, I think it's going to come out in the next two weeks or so. But here's a couple of areas where Shopify has really grown.
Shopify payments, gross payments volume, increased a really impressive 46% in the third quarter and it was 49% GMV penetration, meaning how much it's being used by its merchants or its customers. The merchants, they use its platform. Then you have Shopify capital, which increased 56%. This is a relatively new thing that the company has been doing over the past couple of years, where it's lending to its merchants. Cash advances and also making loans.
You think on the surface, why is Shopify taking on this sort of risk? Now, it obviously uses financial partners for all this stuff to make sure it's falling within regulatory requirements. But we talk about companies that have a data edge. We talk about Facebook, we talk about Alphabet, Apple, these companies that have this massive amount of data about their users.
Shopify is in the same position with their merchants. They understand their revenue growth. They understand the products they're selling. They know the margin profiles of the things that their merchants are selling. It gives them some insights into the profitability of those businesses, honestly, better than a lot of lenders are going to have, in terms of knowing that information very quickly and being able to act on it, and that is so powerful for Shopify. What it also does is it makes its platform that much stickier.
It's one thing if you use somebody to build a website and you want to change to another provider. But let's say you use that company to build your website and you're also using them for your merchant solutions, and you also add Shop Pay, which is there like one-click thing that, let's say I'm a buyer, I'm a customer, and I set up Shop Pay. One time I put in the credit card or debit card or whatever I want to use. I put in my shipping address, it's got my name and all that information. I go to a website and I find something I want to buy and I see Shop Pay there, I click on it. I don't have to give that merchant my credit card number. I don't have to put in my address. All of that carries over.
It is seamless for the user, and the network effect of that, $37 billion since they stood up Shop Pay in 2017, $37 billion in gross merchandise volume. All of those things build network effects and they build stickiness to the users, to the merchants, because it becomes a more embedded part of their business. If you're using Shopify for your merchant solutions on your website and in your retail stores, that's not easy to replace. If you want to leave Shopify, you may need three or four or five vendor solutions that you have to bolt together to replace Shopify. Increasingly, financial services is going to be larger and more important part of that.