8 to 80 Spotlight: Shopify

By Charlie Bilello

02 Dec 2020


A new series covering companies in the Compound 8 to 80 Portfolio

1) Why is Shopify an 8 to 80 Brand?

Shopify is used by over 1 million businesses in 175 countries around the world. Its user-friendly interface allows anyone to set up an online store. With Shopify POS, merchants can also sell their products in person.

In terms of market position, Shopify trails only Amazon in its share of US eCommerce sales.

Source: Shopify

2) What are its growth and financial trends?

Shopify last reported earnings on October 29, 2020.

It continues to be one of the largest beneficiaries of the covid-induced transition to a stay-at-home economy.

Revenues hit a new high during the quarter at $767 million, a 96% increase from the 3rd quarter of 2019.

Created in YCharts

Net Income also hit a new high at $191 million.

Created in YCharts

In the last 5 years, Monthly Recurring Revenue (MRR) has compounded at an astounding 47% annualized rate.

Source: Shopify

While growth has accelerated in recent quarters, gross profit margins remain incredibly strong at 53%.

Created in YCharts

3) The Climb

“At the beginning, there was no grand plan,” says Lake. “We just said let’s do e-commerce, let’s sell some snowboards, and eventually it became Snowdevil.”

Source: The Globe and Mail

Shopify was originally founded by Tobi Lutke (great 2019 interview with Tim Ferris) and Scott Lake in 2004 as an online store to sell snowboards (called Snowdevil). During the process, Lutke was so dissatisfied with existing e-commerce tools that he decided to build his own platform using Ruby on Rails.

“The terminology was wrong, approach was wrong,” says Lütke. “I’m like, You can’t organize a business the way this software forces you to.

After sharing the platform with colleagues, they soon realized the opportunity in helping others sell online was far greater than selling products themselves.

Even as they packaged up snowboards and sent them off to customers, Lütke and Lake both began to realize that their e-commerce software might be an even better product to sell. They persuaded a group of 10 friends and family members (in particular, McKean’s father, and Lütke’s uncle, an entrepreneur who had also immigrated to Canada) to stake them to a starting fund of about $200,000. They named their company Jaded Pixel, later adding the descriptive line “Rockstar E-commerce,” which sounds like a Scott Lake flourish. Lake also came up with the name of the software Lütke was building: Shopify.

In 2006, along with programmer Daniel Weinand, they officially launched Shopify.

They sought additional investors, but there wasn’t high demand…

“My early interactions with VCs were really, really poor,” says Lütke. “People just did not understand what I was doing.”

Then Scott Lake left the company (2008) and Lutke was forced to take on the business aspects at the firm, including raising capital.

“When I took over as CEO,” he says, “I had to essentially get an MBA in a couple of weeks.”

This was not an easy transition for a programmer. At the same, time money was running out, and Lutke was living with his in-laws and drawing down his savings…

Cash flow was so tight that McKean’s [Lutke’s wife] father, and others, had to write cheques so that Shopify could meet its small payroll.

Lütke took the burden of this stress entirely on himself. He told no one at the company. “I was sitting in meetings,” he remembers, “talking with my peers about building things that would take us a year, when I knew we didn’t have four weeks of money left. And I could not let anyone know that.”

But Lutke persevered, and by 2010 Shopify was processing $100 million in sales for customers (see brief history here). They attracted the attention of Bessemer Venture Partners, one of largest venture capital firms. Bessemer organized a Series A of $7 million for 20% of the company in December 2010.

Less than a year later came a Series B round ($15 million) and in 2013 a Series C ($100 million).

In May 2015, the company went public with a valuation of $1.27 billion (source).

Today, its market cap stands at over $131 billion, a more than 10,000% increase from its IPO.

Created in YCharts

4) What are the major risks to continued growth?

From a stock perspective, valuation is the primary concern, as is the case with many tech companies today.

Trading at over 52x sales, current expectations for future growth are extremely high, making Shopify vulnerable should it fail to meet or beat these lofty expectations.

Created in YCharts

5) Howard’s Take

“I added Shopify to the 8 to 80 portfolio this year after holding it for a long time.  In my 2020 predictions I believed Shopify would become a $100 billion company and it did.

But the path was not a straight line, with the stock falling almost 50% during the COVID crash in March. 

Shopify is now what I consider its own ecommerce planet.  The company is almost too big to analyze and place a valuation on.  You own it because it is defining the future of ecommerce.  The Shopify ecosystem is now so big that venture capitalists invest in companies within the umbrella of the ecosystem (this piece further explains).

You also can’t forget about payments and Shopify Money.  I had Alex Danco on my podcast earlier in the year to talk about this part of the business.

So yes, I remain bullish on the long-term prospects of Shopify and believe it is a great 8-80 company.” – Howard Lindzon

To learn more about the 8 to 80 Portfolio managed by Compound, click here.

Read more 8 to 80 Spotlights…
Spotify
Google
Netflix
Amazon
Apple

__

To sign up for our free newsletter, click here.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

Share this post

Recent posts
7-Chart Sunday (11/28/21)
How to Avoid Another Lost Decade