#005 - Shopify

Shopify is the leading e-commerce platform for merchants. Shopify's slogan is "arming the rebels." Shopify is the one company that stands a chance against Amazon, but what makes Shopify so special?

This week is Shopify. Shopify has seen tremendous growth since its IPO in 2015. Let’s dive into Shopify and review their 10-K and some other investor relations material.

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Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Industry Overview

Shopify competes in the broad e-commerce industry. Competitors include Amazon, eBay, Etsy, BigCommerce, and many other companies. Competitors are either platforms like Amazon that connects buyers and sellers or software companies that offer the same or similar services to Shopify. The e-commerce market is broad and is always expanding. It has seen tremendous growth during COVID-19 and it will likely continue growing long afterward.

E-commerce has been one of the largest trends over the past two decades as more and more consumers turn to Amazon or other online stores to buy products. This trend has only accelerated as COVID-19 has forced buyers online to buy many of their purchases.

Business Overview

Shopify was founded in 2004 by Tobias Lütke, Daniel Weinand, and Scott Lake after Lütke struggled to find competent e-commerce software to enable merchants to sell products online. Lütke, originally a computer programmer by trade, made his own software. This was the start of Shopify. The original founders eventually rebranded to Shopify after originally starting as “Snowdevil” in 2004.

Shopify provides tools for merchants (entrepreneurs, small businesses, medium businesses, and large customers) to manage storefronts. Although the traditional focus of Shopify has been to allow merchants to sell physical products online, Shopify has expanded into offering point-of-sale hardware as well as additional tools such as the Shopify Fulfillment Network, Shopify Capital, and 6 River Systems' collaborative warehouse fulfillment solutions. All these tools have been created in order to help entrepreneurs run and scale their businesses. Shopify has long term goals in place to continue to innovate and build out more services and offerings for its merchant base.

This is the primary goal of Shopify. The running slogan is that Shopify wants to “arm the rebels” and help them compete against large players like Amazon.

Shopify serves as the central nervous system for over 1 million merchants as of the end of 2019. This number has likely only increased due to the COVID-19 pandemic and the rush to buy and sell products online. Some of the tools that merchants have access to via their store dashboard are analytics, data, inventory, orders, payments, and many other tools you can think of.

Many entrepreneurs and small businesses sell courses, digital products, or other offerings through Shopify. Although Shopify might be thought of as a company that benefits strictly from selling physical goods, this is not the case. This is another interesting point about Shopify and my personal investment thesis. Shopify is benefitting from many tailwinds such as the rise of the creator economy, direct-to-consumer brands, and entrepreneurship.

Total Addressable Market

Shopify's total addressable is defined as around $78bn in their financial filings, but of course, this is only growing over time. Shopify is empowering more and more people to become entrepreneurs and make it easier for anyone to sell a product or service online. Shopify is actively expanding its total addressable market.

One of the interesting ideas about innovative companies like Shopify is that these companies expand their own market. I briefly touch on this below.

For example, previously most people were deterred from starting a business because it’s too difficult, expensive, or time-consuming. Shopify changed this. Starting an online store can be as easy as spending 1 hour and $29. Previously, starting an online business required some heavy coding expertise or lots of software to piece together all the parts of an internet business. More and more people are confident to start an online store because of the ease of using Shopify and all the tools and integrations it offers.

Shopify has the potential to expand into other adjacent markets related to online commerce. This doesn’t necessarily need to be physical products or even virtual products. Any financial transaction that occurs could one day be powered by Shopify to some extent. If it’s a business trying to build a brand or a solo entrepreneur building a paid community of like-minded people then Shopify may play a role in enabling this. To some extent, Shopify already offers some of these services mainly through the partner ecosystem and all the apps that are available.

Competitive Advantages

From a shallow dive perspective, Shopify has a good set of competitive advantages.

  • Scale

    Because of its size, Shopify is able to pump more money into R&D to enable new offerings to its merchant base. Smaller competitors don’t stand a chance competing against Shopify. Shopify offers more tools through its dashboard and partner ecosystem than smaller competitors will ever have time or money to build. Merchants utilize multiple services to build a complete and functioning online store. Small startups don’t stand a chance trying to build out a shipping network, offering the equivalent of Shopify Capital, or all the integrations and apps offered through the partner ecosystem.

  • Partner Ecosystem

    This is one of the most interesting aspects of Shopify and it’s similar to many other platforms. This is a mini-network effect buried in Shopify. As more designers, developers, and other partners join Shopify’s partner ecosystem, more and more merchants will be attracted to the breadth of offerings of themes, apps, integrations, and more. This will in turn attract more partners, and more merchants, and so on.

    This is a small network effect and isn’t terribly important in the grand scheme of things on Shopify, but it sure does keep competitors out and it attracts more merchants to use Shopify. Another benefit for Shopify is that this provides a look into the future. Shopify can see which apps are most popular among merchants and Shopify can develop tools, offerings, or simply buyout these apps from developers. Shopify did this with Oberlo in 2017.

    As more apps are developed on the platform and more competitors offer software tools for entrepreneurs, Shopify can jump ahead of the competition and buyout these tools or build something to compete with them. For example, if you believe that gated content will be popular in the future, there are already apps that exist on the Shopify platform to enable gated content for paid communities. Shopify can buyout these tools or build a similar offering from the inside to benefit from this trend.

  • Switching Costs

    Merchants don’t want to waste time switching stores, remaking whole websites, managing inventory just to save a few bucks a month. The headache involved with switching websites and storefronts is not worth the small potential cost savings of switching from Shopify to another competitor.

    Merchants want to focus on their business rather than working on smaller details that will not vastly improve their business. Customers also become familiar with Shopify’s dashboard and the rest of the layout of the backend software leading to familiarity and increased productivity. The headache of switching and becoming familiar with the Shopify platform are some of the switching costs that give Shopify a sustainable competitive advantage.


Shopify has some pretty incredible financial results through the end of 2019, and the COVID-19 pandemic has only accelerated their results. These numbers are from the end of 2019, so the results during 2020 are different and may lead to a different result if you’re thinking about investing in them.


  • Total revenue = ~$1.58bn

  • Subscription solutions revenue = ~$640mn

  • Merchant solutions revenue = ~$940mn

  • GMV = ~$61.1bn

  • Gross profit = ~$870mn


  • Total revenue = ~$1.07bn

  • Subscription solutions revenue = ~$460mn

  • Merchant solutions revenue = ~$610mn

  • GMV = ~$41.1bn

  • Gross profit = ~$600mn


  • Total revenue = ~$670mn

  • Subscription solutions revenue = ~$310mn

  • Merchant solutions revenue = ~$360mn

  • GMV = ~$26.3bn

  • Gross profit = ~$380mn

There are many other aspects of Shopify’s financial information to dig into such as the differences in the cost of revenues between the software-related revenue and the merchant solutions revenue. This is just a shallow dive and if you’re interested in doing a full deep dive on Shopify, do your own due diligence and valuation work.

What’s Interesting

Shopify is one of the few companies that has been able to compete against Amazon and be successful thus far. Amazon is a behemoth of a company and typically companies don’t survive if Amazon tries to enter their industry. Shopify is an outlier.

Shopify also benefits from some interesting tailwinds such as the move for companies to sell direct-to-consumer (DTC), e-commerce, and the creator economy that I’ll now dig into more below.


Many companies are skipping the traditional method of selling by going through Amazon, Walmart, or other “middlemen” and instead relying on Facebook, Google, and other advertising in order to get out in front of customers. Selling directly to consumers has multiple benefits. First, products sold directly to consumers typically have a higher gross margin. Second, companies are able to establish a brand and a direct relationship with customers when going directly to them instead of going through a middleman.

Companies like Nike, Lululemon, and many other companies (not just clothing companies) are investing in this new revenue line in order to grow profit margins. Shopify “arms the rebels” by enabling companies to establish their own brand instead of simply selling a product on Amazon where consumers might just be comparing the cheapest option.


Everyone knows e-commerce is growing and it’s not even a majority of the total GMV sold in the world. COVID-19 has accelerated e-commerce by a decade.

Creator Economy

As more entrepreneurs look to create physical products, digital products, or facilitate transactions online, Shopify will serve as the foundation for many of these people. Whether it’s YouTube personalities creating merchandise or people on Twitter creating courses, communities, or gated content, Shopify will help to power many of these transactions. Shopify has the ability to empower these creators and collect a small portion of revenue based on their success.

Future Questions

  • Valuation?

    Shopify has seen tremendous growth during the COVID-19 pandemic and its stock price has risen above $1,000. More work is needed to understand the long-term potential of Shopify and whether the current price gives investors a fair rate of return over the next 3-5 years. I think Shopify has many potential tailwinds but valuation may be a concern to some investors.

  • 10x potential?

    Shopify has a market cap of ~$144bn which makes it one of the largest tech companies. If you’re looking for 10x potential like I am, Shopify may not be the best company for you, but I do think it has the potential to grow. Shopify is still growing revenue at a fast rate and there seems to be a long runway of growth ahead of it.

    There are only 4 companies that are above $1tn in market cap (Microsoft, Google, Apple, and Amazon). These are the largest companies in the world and it’s difficult to say that any company will be above $1tn, but I do think Shopify has this potential if they continue to empower entrepreneurs, small businesses, and all other businesses in the world.


Shopify is an innovative and interesting company that I believe has a long runway of growth and lots of future potential. Shopify has room to expand into other areas to help empower entrepreneurs and small businesses.

Fun Facts

Shopify refers to its people and partners as Shopifolk.

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