The Motley Fool

A Special Report

Our Top Growth Idea for New Money Today

By: Iain Butler, Chief Investment Adviser

Fellow Fools,

You’ve just read about three Canadian companies that we believe are well past their prime and are potentially good candidates for a “sell”. And while money can still be made investing in such entities, it’s our opinion that you’ll have better luck elsewhere – like, say, investing in companies that are just coming into their prime.

Meet Shopify (TSX:SH)(NYSE:SHOP).

Exhibit A when it comes to promising, emerging Canadian companies on the cusp of greatness.

Born of humble beginnings, here we have what we Fools believe could be the best Canadian opportunity we’ve come across since the inception of Motley Fool Canada, and especially our Stock Advisor Canada members-only advisory service.

Let’s jump in…

Nice to meet you

Shopify’s (TSX:SH)(NYSE:SHOP) beginnings date to 2004, when founder and current CEO Tobi Lutke wanted to sell snowboards online. He quickly realized that the tools available to do so were largely tied to helping large corporations develop their e-commerce capabilities. These tools were expensive and completely ill-suited to Lutke’s purpose.

So, like so many entrepreneurs, he decided to create his own software. However, it quickly became apparent that selling snowboards wasn’t the bread-and-butter part of the equation. The real business was in selling the software that he’d developed to help fill a glaring hole in the market. In 2006 Shopify was launched with this intent in mind.

Today more than 275,000 merchants use the Shopify platform to power their online businesses. This collection spans from entrepreneurs to multi-billion dollar corporations; however, the company’s focus remains very much tied to the small- to medium-sized businesses of the world.

The story of Shopify’s inception is compelling, but, in our minds, it’s still early days. Settle in and prepare to learn all about what might be the most visible company that you’ve never heard of.

A real Canadian rule breaker

Many of our reasons for why we’re keen on Shopify’s long-term prospects can be summarized by following six points that our co-founder and chairman David Gardner uses to identify companies that he considers qualify as “rule breakers.” In David’s words, these are companies that actively break the “rules” of how business is done and, admittedly, they are few and far between in the Canadian market, which makes Shopify an incredibly unique opportunity for you.

Let’s run through David’s criteria:

1. They are the top dogs and first movers in important and emerging industries.

Few would question the importance, or at least the significance, that is the world of online commerce. The evolution in this industry has been considerable over the past decade, and there’s no sign of this slowing any time soon.

And though there are other e-commerce platform providers, Shopify effectively invented the small-to-medium-business (SMB) niche in which it exists. By all accounts, theirs is the most complete offering in this niche, and maybe the entire space. If a merchant wanted to recreate what Shopify offers, they’d have to sign on with multiple providers, effectively piecing them together and creating a Frankenstein-like platform—and who wants to do that?

2. They have visionary leadership and smart backing.

There are a couple of angles to explore on this point. The company remains founder-led and inside ownership is high—both good signs. What put us over the edge on this one, however, was an interview we conducted with John Ruffolo, CEO of OMERS Ventures. OMERS is a large Canadian pension fund and was a relatively early, pre-IPO, Shopify shareholder. Ruffolo’s group continues to carry a position in the Class B shares, but what grabbed us was how he described the company’s management team. He lumped Shopify in with several other relatively early-stage companies that they’ve invested in when he made this comment:

“Each one has a founder or founding team that display an amazing passion for what they’re doing, and really, at all costs, would be driving their business. And, in fact, all of the businesses I just mentioned all arose post-2008 financial crisis, where they had to bootstrap themselves, and learn to make money the hard way, without any capital. And it was really their passion of driving the business.”

These words are like sweet music to our investing ears.

The other “angle” to explore on this front are the companies that Shopify has climbed into bed with. These include the likes of Facebook, Twitter, and Pinterest, but in our minds the most notable is e-commerce retail giant Amazon. Perhaps this is our Canadian modesty shining through, but, somewhat remarkably, last fall Amazon shut down a competing service that it offered and replaced it with Shopify’s platform. There is a budding relationship between the two and it will be interesting to see where it goes in the years ahead.

3. They have identifiable competitive advantages.

Aside from Shopify’s platform superiority, the company has developed a real underlying ecosystem that’s created a significant network effect around the business. A collection of app developers, theme designers, and other platforms have evolved around the Shopify ecosystem, creating a web of sorts that’s led to significant organic growth as word of mouth has been a primary driver of this company’s success. As this collection grows, it improves the Shopify platform, attracting more merchants, which in turn perpetuates the growth of the collection of service providers connected to the platform.

4. They’re good brands.

Because of Shopify’s behind-the-scenes offering, it may not be a household name. However, we can again turn to the endorsement by Amazon, and the others mentioned, to indicate how the company is viewed by its peers and the value of its “brand.” In addition, beyond its vast collection of SMB merchants, the company has embarked on pursuing large corporations to use its platform offering. Shopify Plus now counts the likes of Tesla, Procter and Gamble, Budweiser, and Patagonia as customers, further adding to its credibility.

One other tidbit on this front—in a recent conference presentation, Shopify’s COO indicated that the television show Shark Tank, which is the U.S. version of CBC’s Dragon’s Den, now requires participants to be up and running with a Shopify-backed platform before appearing on the show.

5. Their stocks have already done pretty well.

Check—sort of. The company IPO’d in May 2015 and zoomed out of the gate. After that initial rush however, some of the momentum was kicked out of the stock, and it currently sits about 21% higher (on the TSX) than where it closed after its first day of trading. Bolstering this somewhat, over this period Shopify’s stock has outperformed the S&P/TSX Composite by about 26%.

6. Stodgy, backward-looking observers will be jumping all over each other to declare the shares “overvalued.”

Investing in Shopify is not a valuation call in our minds. Though it’s growing like crazy—the company grew the number of merchants on its platform by 68% in 2015—it’s not profitable. Therefore, things like fundamental valuation analysis don’t necessarily apply. If you’re stuck on this point, it would be very easy to pass over this company and all that it has accomplished and, more importantly, has to offer.

The approximate 275,000 merchants that have signed on really just scratch the surface. The company considers its potential market size (in just the parts of the world that it’s currently focused on) to be about 10 million merchants. And if this is broadened to the rest of the world, the figure grows to 46 million. Given this vast opportunity, to consider this company “overvalued” at current levels has the potential to look very foolish in the long term (note the small “f”).

Foolish bottom line

Our Stock Advisor Canada team is outright giddy about this potential opportunity and can’t wait to watch, and hopefully profit from the company going after it over the next decade. Equally exciting is uncovering an actual David Gardner “rule breaker” right here on our home turf. A rarity, to say the least. Put your hopes and dreams aside for a resurgence in Bombardier, or a correction in energy prices, or some miracle growth formula arriving on BCE’s doorstep and turn your attention to where there’s real opportunity in the Canadian market. On this front, we think Shopify stands second to none.

Fool on!

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David Gardner owns shares of Amazon.com, Facebook, and Tesla Motors. Iain Butler owns shares of Shopify. Tom Gardner owns shares of Facebook and Tesla Motors. The Motley Fool owns shares of Amazon.com, Facebook, Shopify, Tesla Motors, and Twitter.