Last week saw a flurry of coverage about pot legalization and the celebratory atmosphere surrounding it. As reports of sold-out stores and hours-long lineups surfaced, attention turned to cannabis companies and how they handled the situation. Were the shortages good or bad news for vendors? Would cannabis demand remain strong, or would it decline after the initial euphoria wore off? Would manufacturers be able to up production in time to prevent more shortages?
As journalists and market commentators debated these and other questions, one assumption remained largely unchallenged: pot legalization was really the story of cannabis manufacturers, and its consequences would mainly be of interest to people who had invested in cannabis stocks.
But now, as the numbers are starting to roll in, one company is beginning to look like the real winner of legalization. It’s a company that has handled cannabis sales better than many of the vendors who offered cannabis to their customers in-store. It’s a company that few associate with the cannabis industry, but it may ultimately play a bigger role in deciding its fate — at least domestically — than cannabis manufacturers themselves.
That company is Shopify (TSX:SHOP)(NYSE:SHOP). Shopify made headlines recently by managing the first week of legalization without a single service outage — despite more than 100 pot sales per minute.
To understand why this is fantastic news for Shopify, we need to understand the company’s business model and how it earns revenue from cannabis.
Shopify makes most of its money from vendor subscriptions. Subscription fees range from $29 per month for the lite version to $2,033 per month plus a cut of sales for the most advanced version. As a result of signing up vendors, Shopify has benefited from cannabis sales. Vendors that have tapped Shopify to run their e-commerce operations include Tweed, CanniMed, and several provincial cannabis stores.
While specific sales figures from last week haven’t been released yet, sources inside Shopify say the platform was seeing 100 sales per minute in the first 12 hours of legal sales. In addition to subscription fees, Shopify collected $0.30 plus between 1.6% and 2.9% of those sales.
A PR goldmine
For large stores, Shopify fees can get rather steep. In order to justify its fees, Shopify needs to prove that it’s a platform vendors can count on. This means showing that Shopify sites have strong uptime, speed, and payment processing. And last week’s events have shown that Shopify can deliver on all three counts. Despite processing hundreds of sales per minute, the platform did not experience a second of downtime. This is a serious vote of confidence for a company that’s trying to sign up more vendors, and you can bet that potential customers are watching.
Does this make Shopify a buy?
And now for the big question: Is last week’s good news enough to make Shopify a buy?
It depends on how you think about it. Shopify is already growing revenue quickly at about 62% year over year. Cannabis sales will no doubt contribute to that growth, but it remains to be seen whether it will be enough to make the company profitable. Shopify has a long history of burning through cash, and even a big sales boost may not result in strong earnings. For now, it may be best to wait for the next income statement.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.