Shopify Inc. (NYSE: SHOP) has come a long way since the company’s initial public offering in 2015. The Shopify stock price hit $458 recently, up 191% in just the past year. Over the same period, the S&P 500 is up only 26%.

That gives the company a market cap of $53 billion.

Shopify’s advantage is that it has virtually no competition at its level in the commerce software business. It is among the tech companies that have been able to distribute products and services efficiently because of a cloud-based model.

What Is Shopify?

The company describes itself as the “all-in-one commerce platform to start, run, and grow a business.”

Shopify currently has a million customers worldwide. Its target customer base is small companies.

It announced that it crossed the 1 million customer barrier last October. Founder and CEO Tobi Lütke said, “With over one million businesses now built on Shopify, together we’re rewriting the rules for our modern economy.” While the news was impressive, the statement was overboard.

The company uses basic retail sales tactics to get new clients. Among these is the age-old “free trial.” This lasts for 14 days.

The company’s price model is $29 a month for a basic package, $79 for a mid-tier package and $299 a month for the high-end service.

Shopify’s services include the ability to build a complete e-commerce sales platform. It also allows clients to offer and track free shipping, offer discount codes and set up several online stores at once.

Unlike many e-commerce operations, Shopify offers tools and hardware that allow people to shop in physical stores. This is helpful to the brick-and-mortar part of retail, which has been decimated by Amazon and other large e-commerce businesses. It also offers a fulfillment network with prices many small online companies could not get on their own.

Shopify also allows clients to target Facebook ads, which gives the clients a social media capacity that is usually reserved for larger businesses.

How Have Its Financials Done?

The Shopify results have been extraordinary, which has driven the Wall Street target price higher. KeyBanc Capital Markets recently praised Shopify.

Credit Suisse’s Brad Zelnick is among the Wall Street analysts who trace the company, and he recently voiced optimism about its prospects. He put an Outperform rating on the stock and raised his target price to $450 to $370. Zelnick told Barron’s, “We anticipate Shopify will continue to execute against its secular growth opportunities in 2020.”

Shopify posted strong numbers in the third quarter, the most recent one posted. Revenue rose 45% to $390 million. The company continues to lose money because of a large investment in both sales and marketing. It is also putting growing investment in research and development.

The operating loss for the quarter was $35 million, about the same as last year.

The company also announced Subscription Solutions revenue grew 37% to $165.6 million. Merchant Solutions revenue grew 50%, to $225.0 million.

Fourth-quarter results most likely will demonstrate that the growth rate continues.

As the numbers were announced, Lütke said, “More than a million merchants are now building their businesses on Shopify, as more entrepreneurs around the world reach for independence.”

At the end of the quarter, Shopify had $1.1 billion in cash and $1.5 billion in marketable securities. Against that, it had no debt.

What Does Wall Street Like About Shopify?

Clearly one of the attractions of Shopify is that it is in the heart of the burgeoning e-commerce industry. Over the holiday season, retail sales rose by 3.4%. However, e-commerce was up 15%, a record. Steve Sadove, senior adviser for Mastercard, commented, “E-commerce sales hit a record high this year with more people doing their holiday shopping online.”

Because Shopify has so many online businesses, its exposure to this success is considerable.

Shopify clearly rides the coattails of Amazon.com Inc. (NASDAQ: AMZN), which based on some estimates is a third to a half of the U.S. total. With a market cap near $950 billion, Amazon is among the most valuable companies in the world.

In the third quarter of last year, its revenue reached $70 billion, up 24% from the year earlier.

Amazon does have one large advantage over other e-commerce companies. Its Amazon Web Services (AWS) is the largest cloud computing business in the world. It is highly profitable, as well as a hedge against and a downturn in e-commerce.

Analysts who cover Shopify stock are split. The Wall Street Journal shows that of the 30 analysts who cover the company now, 12 rate it as a Buy. Another 13 recommend holding shares. The average price target for the stock is $375, well below where the shares are now.

Who Started Shopify? How Did It Grow?

Shopify is based in Ottawa. It was founded in 2004 by Tobias Lütke, Daniel Weinand and Scott Lake. Lütke continues as CEO. The company began as an online way to buy snowboarding equipment.

It has grown both organically and via acquisitions. The company bought wholesale e-commerce company Handshake, and more recently 6 River Systems, a fulfillment operation. Both deals were announced in 2019.

The mix of organic growth and acquisitions has driven impressive numbers. Revenue in 2016 was $389 million. That rose to $673 million in 2017 and to $1.1 billion last year. Over the trailing 12 months, revenue was $1.4 billion.

Note that Shopify lost money each of those years. Free cash flow also has been negative in that time.

Weaknesses of Its Model Moving Forward

Shopify has two critical problems. The first is that it is in only one business, e-commerce supply. Ironically, the other is that it does not have a large brick-and-mortar operation.

Amazon’s basic e-commerce business dwarfs those of Shopify’s customers. A change in how Amazon addresses the market means that the entire market has to change. This has certainly held true with free one-day or same-day delivery. Amazon has spent hundreds of millions of dollars getting these initiatives up and running.

The new, speedy Amazon service already has started to reorient customer expectations. If one-day delivery is the standard, can Shopify clients afford it?

Additionally, Amazon offers more and more unique products and services each year. The most recent of these is its streaming media service and Alexa-powered personal assistant powered devices. When people visit the Amazon site, it has much more than merchandise to sell.

Amazon Prime is another service no other e-commerce firm offers. In fact, none has anything close. Amazon has 100 million subscribers who pay it $119 a year. Estimates are that Prime members shop 2.5 times more often at Amazon than non-Prime members.

Brick-and-mortar retail, once considered a death sentence in the industry, has changed, at least for very large players. Walmart has started to push its e-commerce revenue via the ability of people who buy online to pick up at stores. Similarly, Amazon has used its buyout of Whole Foods as a means to sell and ship food to people’s doorsteps.

Shopify has been a very good business for both its clients and its investors. But both groups have to have some level of anxiety as the world of e-commerce shifts rapidly, often radically, every year.

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