Is It Time to Bail on Shopify Inc (TSX:SHOP)?

Shopify Inc’s (TSX:SHOP)(NYSE:SHOP) incredible growth streak is being threatened by various tech giants. Is it time to sell?

| More on:
Online shopping

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

A few weeks ago, I argued that Shopify (TSX:SHOP)(NYSE:SHOP) could double its share value by year-end. After all, the market-beating tech company has been flying high recently. So far this year, Shopify’s share price is already up by more than 50%, and we aren’t halfway through the year yet. However, a series of challenges have recently been threatening Shopify’s growth. Various corporations are now positioning themselves as rivals of the Ontario-based company. Is this the end of Shopify’s Cinderella story?

How Shopify got to this point

Central to Shopify’s success has been its business model. While there are scores of e-commerce platform, the company has managed to attract a specific portion of the market. Merchants looking to build a customized online platform from scratch know to turn to Shopify. Not only does Shopify allow these merchants to create an online store that is tailored to their target market (thus making the marketing aspect much easier), Shopify also helps merchants manage various aspects of their business.

Leveraging this strategy, Shopify built a solid competitive advantage. The company’s platform comes with high (or perhaps tedious) switching costs. Once merchants have built a highly customized online store, they won’t be willing to jump ship, not easily anyway. The number of merchants on Shopify’s platform has risen significantly over the past few years. In 2016, the company had about 378,000 merchants (at year end). Shopify currently has in excess of 800,000 merchants, which represents an increase of more than 100% over the past two years.

Further, Shopify benefits from this high traffic in other ways, as the company’s App Store — which was first launched in 2009 — becomes increasingly popular among merchants. According to the company, over 80% of merchants use various apps to run their operations. Shopify partners generate hundreds of millions of dollars in revenue every year. With thousands of app developers (and growing) offering services on Shopify’s App Store, the tech firm has successfully built a community. This community will be critical to Shopify’s future.

Danger looms

Not all is rosy for Shopify at the moment. The company is facing new and increased competition. First, there is a new challenge from Instagram (owned by Facebook). Merchants previously had the option of connecting their Instagram and Shopify accounts. However, it was recently announced that Instagram would allow users to purchase items directly from their Instagram account, leaving out Shopify entirely. Square is another company currently challenging Shopify. Last year, the payment processing firm acquired website-builder Weebly.

Square is now ready to launch its own fully fleshed out e-commerce platform (powered by Weebly technology), which will, of course, compete with Shopify. Perhaps the biggest challenge coming Shopify’s way stems from Microsoft. The legendary tech company is currently considering venturing in the e-commerce sector. E-commerce sales still account for a very small percentage of retail purchases in the U.S. This number is set to continue growing, however. Thus, it isn’t surprising that Shopify is facing more and more competition from tech companies looking to get in on the act.

Is Shopify in trouble?

Shopify is facing an increasingly competitive landscape. Though the company has managed to build a moat, firms with the name recognition and resources necessary could eat up enough market share to undercut Shopify’s future growth. Despite these challenges, I believe Shopify has built enough of a lead to maintain a reasonable portion of the market share. I think it is unlikely that newcomers to the e-commerce sector completely erode Shopify’s lead. Thus, I am not willing to give up on Shopify just yet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. 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. David Gardner owns shares of Facebook. Tom Gardner owns shares of Facebook, Shopify, and Square. The Motley Fool owns shares of Facebook, Microsoft, Shopify, Shopify, and Square. Fool contributor Prosper Bakiny owns shares of Shopify. Shopify is a recommendation of Stock Advisor Canada.

More on Tech Stocks

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

Could Lightspeed (TSX:LSPD) Stock Hit $50 in 2022?

The significant selloff in Lightspeed stock seems unwarranted, especially as the company has multiple growth catalysts and is delivering robust…

Read more »

analyze data
Tech Stocks

Fantastically Cheap TSX Tech Stocks

Investors should benefit from buying cheap tech stocks that are growing their profits in this market correction.

Read more »

Wireless technology
Tech Stocks

2 Quality Growth Stocks Breathe Life Into the Tech Sector

The battered technology sector has been advancing lately thanks to two quality growth stocks with pricing powers.

Read more »

clock time
Tech Stocks

Now’s the Time to Load Up the TFSA With These 2 Top TSX Stocks

Here are two top TSX stocks that long-term growth investors may not want to give up on, especially at these…

Read more »

shopping online, e-commerce
Tech Stocks

Shopify (TSX:SHOP) Stock Recovers 30% From its 3-Year Lows: Should You Buy?

Shopify stock: Should you buy the dip or wait for more weakness?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Tech Stocks

What Market Correction? 2 High-Growth Tech Stocks That Are on the Rise

I don’t think it will be long before these two Canadian tech stocks are back to delivering market-crushing returns.

Read more »

grow dividends
Tech Stocks

Why Kinaxis (TSX:KXS) Stock Jumped 14% Last Week

Kinaxis Inc. (TSX:KXS) stock popped over the past week after adding yet another big company to its impressive stable.

Read more »

potted green plant grows up in arrow shape
Tech Stocks

TFSA Investors: Double Your Investments With These 3 Top Growth Stocks

Despite the volatility, I am bullish on these three stocks, given their solid growth potential.

Read more »