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Applying Porter’s 5 Forces to a Canadian Masterpiece!

After an incredible run to over $200 per share, Shopify Inc. (TSX:SHOP)(NYSE:SHOP) has now pulled back to a price near $153 per share. Although this drop in price has wiped out a lot of value for many investors, the reality is that this name may have the brightest future of any Canadian company currently available.

Let’s take a look at Shopify Inc. (which facilitates the online operations of small businesses) as a function of Michael Porter’s five forces.

Bargaining Power of Buyers

With many small business owners either seeking an online presence or potentially launching a new endeavor, the power between Shopify and the buyer is clearly with the company. Although the cost of customer acquisition may be relatively high, the reality is that once a customer gets onto the company’s platform and integrates the various aspects of their website (sales, shipping, online support), it becomes very difficult to leave the platform.

Bargaining Power of Suppliers

With so much of the back-end already owned and integrated into the company, the real suppliers of Shopify Inc. are the software engineers who run the website. Although these essential parts of the business receive a very high salary, the truth is that additional talent can always be hired and there are limits to the cost of running the business.

Threat of Substitutes

As a fully integrated user friendly system, it will become increasing costly to replicate the current offering of Shopify Inc. Although many larger companies will have the funds to operate their own standalone operations, the target market remains small and medium-size businesses.

With few competitors currently offering a comparable fully-integrated service, the threat of substitutes is not major at this time.

Threat of New Entrants

In spite of the potential to make a very large amount of profit down the road, the threat of new entrants, although very serious for any specific component of the business, is not a major concern for customers who are operating websites that are more complex. With so customers running their own websites with more complex solutions, the barriers to entry increase as time goes on.

As Shopify Inc. continues to refine their operations, the challenge of offering a comparable product becomes increasingly difficult.

Industry Rivalry

For mature companies, industry rivalry becomes extremely important once the pie stops growing at a high rate. For companies in a growth sector, the competitiveness between firms is not as important. Investors should instead worry about the total market share controlled by each name, as it’s very possible to see increasing revenues and profits while losing market share.

With so much potential, investors must be ready to accept the highest risk (volatile stock) in order to reap the large profits that are expected to materialize down the road. After all, the company has been able to turn the corner and begin generating positive cash flow. The next corner will be profit.

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Fool contributor RyanGoldsman has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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