Shopify Inc.: A Rapidly Growing Tech Company That You Should Own

After having a very good 12 months, with the stock price increasing from $40 to over $100, investors are now wondering whether they should continue to own Shopify Inc.  (TSX:SHOP)(NYSE:SHOP) or if they should get out and take their profits. Although taking profits is typically not a bad idea, I believe that there is significant room for growth for Shopify.

Shopify is an e-commerce software-as-a-service (SaaS) platform. It helps small to large businesses launch an online store, taking away the hassle of design & development. In the past, you’d need to spend thousands of dollars to get your website online and then have a developer available to make updates if your inventory changed. With Shopify, that’s all streamlined so even grandma can upload new products.

All a customer has to pay is a monthly fee, which is the perfect business model for a couple reasons. First, the company knows exactly how much money is coming in, thus making it easy to hire and invest for the future. But second, this low-cost, monthly fee makes the product very sticky for its customers. To leave and find a new provider is more expensive than just continuing to pay the monthly fee, which lowers churn significantly.

What I also like about this SaaS model is that, once a client is in the system, Shopify can generate incremental revenue through its merchant solutions. That includes payment processing and printing shipping labels. Although the margins on this are not as great as the monthly fee, it scales based on how much business the client is doing. It also owns Shopify Capital, which is a service to front clients money for inventory and then Shopify gets repaid from sales. This model is lucrative because Shopify can analyze how much revenue each client makes.

So how is the business doing?

Revenue growth is massive. In 2014, it had $105 million in revenue. In 2015, that grew by 95% to $205.2 million and by 2016, that had grown another 90% to $389.3 million. Its merchant solutions have also increased as a share of revenue, which is a sign of network growth. In 2014, customers sold $3.8B on the Shopify platform. By 2016, that had ballooned to $15.4 billion. Remember, merchant solutions scale with clients, so the better clients do, the better Shopify does.

Monthly recurring revenue is also continuing to increase. In Q1 2012, Shopify brought in $1.1 million per month. By the end of 2016, that had grown to $18.5 million per month, which is a compound annual growth rate of 81%. But while revenue is going up, operating leverage is going down. As a percentage of revenue, it has gone from 74% in 2014 to 57% in 2016 and I anticipate this number will continue shrinking.

But the potential for growth is where Shopify really shines. In its current core geographies, it is targeting 10 million potential customers that could bring in $10 billion in revenue per year. However, the global economy is 46 million customers that could bring in $57 billion in revenue. And, frankly, there aren’t many platforms that are as easy to use and intuitive as Shopify, so I see little reason why it won’t continue to experience growth like it has over the previous years.

Shopify is a solid platform with a great business model. Although it is trading far higher than it was only a year ago, I believe that it has a lot more growth to achieve, so I expect its stock price to continue going up. This is definitely a company worth owning.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC.

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