Why Investors Should Be Excited About Shopify Despite Iffy Numbers

The expansion of the Shopify (SHOP -2.37%) Fulfillment Network is reason enough to keep investors' attention. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on March 2, Motley Fool contributors Brian Withers and Toby Bordelon discuss how the e-commerce giant might be shifting its model and emulating Amazon (AMZN -1.64%) in a way, in terms of operating its own logistics network and merchant fulfillment.

Brian Withers: Moving on to Shopify, ticker symbol S-H-O-P. By now, you've seen the Shopify results and the market reaction. Market wasn't really thrilled. Top line grew 41% year-over-year, which honestly to me is pretty darn awesome. But, that's slowed since the previous quarter of 46% year-over-year growth. And the last Q4 of 96, so growth is slowing overall. The outlook and the increased spending that management talked about didn't help at all. In 2021, the full-year was 57% growth and the company said in the coming year, 2022, it was going to grow slower than that but faster than the overall e-commerce market. What's growth going to be next year? Management left it a little bit up in the air. This left investors with a bit of a sour taste in their mouth. But given all that, there is something that I'm really excited about from the quarter that you may have missed. President Harley Finkelstein gave an update on the Shopify Fulfillment Network and he said, "We're consolidating our network into larger facilities. We'll operate more of them ourselves, we'll unify the warehouse management software that we've been building and testing over the past 18 months. We expect that these changes will enable us to deliver packages in two days or less to more than 90% of the U.S. population while minimizing inventory for Shopify Fulfillment Network customers." I want to show you a quick little video. It's only a minute to show you a little bit about what the Shopify Fulfillment Network is all about, so here we go.

[Video] "Introducing Shopify Fulfillment Network. Here's how it works. You send us products by selecting items from right inside your Shopify admin. We suggest where your inventory should be stored using smart recommendations to keep products close to your customers. We'll let you know when your inventory is running low so you maximize sales. We ship your orders picked and packed with the help of Chuck. Thanks, Chuck. This is used to improve speed and accuracy during fulfillment. You delight customers with a custom unboxing experience that keeps your brand front-and-center. Now, you deliver the experience your customers expect all while keeping ownership of your brand and data. Join the only network for you own the entire end-to-end experience. Shopify Fulfillment Network. Ship your orders faster for less."

Withers: There you go. It's a little bit of a dig on Amazon if you know how Amazon treats its sellers. CFO Amy Shapero explained a little bit more about it. She said, "As we looked ahead into 2022 we'll continue to build our solution by operating more major hub warehouses ourselves while still leveraging high performance partners where it makes sense." This totally makes sense to me as the company is really a software specialist and the only way that they can control that experience for the merchants end-to-end is really to own these warehouses and enable them to specifically set up that software for what these customers need, both small customers and some of their largest Shopify Plus customers. I'm pretty excited about what this will bring for these merchants in the next couple of years.

Toby Bordelon: Brian, was that robot's name Chuck?

Withers: It was. That's the six river robot.

Bordelon: Nice, pretty awesome. Here's my question. It looks like from that video that Shopify is trying to become something more like Amazon, in terms of operating its own logistics network and merchant fulfillment. I'm wondering if you think this is a good move because this is a pretty massive capital-intensive undertaking, I think. It took Amazon years to get to where they are today and they are still spending major money on this. Does this seem like a big shift for Shopify growing from a SaaS capital-light business to a more capital-incentive model that requires more facilities and more employees at a time when labor costs are high?

Withers: Toby, you're totally right. I go back to what Founder Tobi Lütke talks about when he talks about what Shopify is going to bring on itself. Shopify has a massive network of partners, both for setting up websites, building third-party apps and all of that stuff. For the longest time, Lütke has focused on what Shopify will do in-house versus move to a partner and it's a very simple statement. He says, "We will focus on what most merchants need most of the time." Shopify has been around since, I want to say 2007-ish. The fact that they're just now getting into this says that more and more of their merchants are growing and becoming bigger things. You talked about the spicy hot sauce that you saw, that example, that merchant was outgrowing his own fulfillment. He was hiring neighborhood kids to come and do it and he's tried to get other fulfillment partners and they just didn't personalize the service the way he wanted. To use their packaging and their inbox messaging and those things gave it a real personal touch and allowed his brand to stand forward versus coming forward in an Amazon box.