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Why Instagram Checkout Could Be a Big Problem for Shopify Inc (TSX:SHOP)

This week, Instagram launched a new feature called Checkout, which will allow users to make a purchase when viewing a product without having to go onto an external website, such as one that is hosted by Shopify (TSX:SHOP)(NYSE:SHOP). The company, which is owned by social media giant Facebook (NASDAQ:FB), reported that it had 500 million daily users as of January.

With that many users on Instagram, having a checkout option is going to be very appealing for prospective sellers. While it’s not clear yet how much of a fee merchants will be charged by Instagram for purchases, it has a big advantage over Shopify, and that’s convenience. Ultimately, Shopify doesn’t have much moat to protect itself from new entrants, and that’s a significant reason why I’d be hesitant to pay the big premium that the stock trades at today.

Will users trust a Facebook company with their purchases?

Although some investors may be wary of getting involved with Instagram given the data and security issues that its parent company has faced in recent years, there doesn’t appear to be any significant fallout from that. Facebook and Instagram still have significant user bases, and the ease of use in being able to just buy a product with fewer steps is definitely going to appeal to consumers.

As much as security may be weighing on the minds of some consumers, Instagram has seen its daily active users continue to rise, suggesting it’s not as big of a concern as it might appear to be. Facebook is also working on improving its processes, which should appease existing users.

The good news for Facebook and Instagram is that the hard part — attracting so many users to their platforms — has already been done. By putting policies and controls in place to help protect data, it could help ensure those users don’t end up leaving. And with the popularity of Facebook and a lack of any rivals, there are few options for disgruntled users anyway.

More challenges for Shopify

This is all bad news for Shopify because with a lot of eyeballs on products and Instagram being able to utilize its sizable user base, there’s little reason for merchants to choose to use Shopify, unless there is a big difference in fees. One of the key benefits Shopify has always tried to sell merchants on is its ease of use, and with Instagram being even easier and simpler to implement, that’s going to make it more challenging for the e-commerce company to keep its vendors from opting for the social media site instead.

Shopify stock declined on the news, but it’s still coming off a new all-time high. If Instagram is able to wrestle away significant market share, there could be a lot more downside to Shopify stock today. While Shopify still has time before Instagram Checkout becomes more prevalent and a big threat to its business, I’m not sure there’s much it can do about it anyway. With more competition in the industry, Shopify’s days of high growth might be numbered.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Facebook. Tom Gardner owns shares of Facebook and Shopify. The Motley Fool owns shares of Facebook and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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