Shopify Inc.’s competitive position is “almost unassailable”, Macquarie says

These days, Shopify Inc. (Shopify Stock Quote, Chart, News: TSX:SHOP, NYSE:SHOP) doubters seem to be coming out of the woodwork, as the e-commerce company’s share price fell today on news of its first quarter results.

But with its solid business model and sky-high growth potential, there are plenty of reasons to be bullish about Shopify, says Gus Papageorgiou of Macquarie Capital Partners.

Shopify released its first quarter 2018 results this morning, posting total revenue of $214.3 million, a 68 per cent increase from Q1/17 and beating analysts’ consensus estimate of $202 million. The company reported a loss of $20.3 million, which captured nine per cent of revenues (down from 11 per cent over Q1/17) but beat the consensus of $25.0 million, while its Subscription Solutions revenue grew by 61 per cent and its Merchant Solutions revenue grew by 75 per cent.

“Merchants love Shopify because it allows them to sell anywhere, anytime. It also helps them with the many tasks that come with running a retail business,” said Tobi Lütke, Shopify CEO, in a press release. “These layers of value we offer merchants give us a healthy variety of growth drivers. One of those drivers is our merchants’ own success. Helping them get their first sale and keeping them selling is a big part of what we work on every day.”

Even with the consensus beat, however, investor reaction has so far been negative, as Shopify’s share price fell over eight per cent in today’s trading. The response is said to be related to a perceptible slowdown in momentum for the company, which experienced 90 per cent year-over-year revenue growth in 2016, 73 per cent growth in 2017 and is now projecting a growth rate of about 50 per cent for 2018.

Still, those numbers shouldn’t cause worry, says Papageorgiou, since up until now the company has barely scratched the surface of its penetration potential.

“It’s pretty simple, really. E-commerce is growing, and Shopify is a great platform for a small-to medium-sized business to establish an online presence. In fact, it’s the best,” says Papageorgiou, associate director of technology research at Macquarie, to BNN Bloomberg. “It’s easy, it’s inexpensive and it’s proven to help merchants of all sizes to generate revenue and increase their sales. So, fundamentally, the story is very solid.”

“One of the reasons I’m so aggressive on Shopify is that I think their competitive position is almost unassailable, given their scale, the data that they have, their ecosystem. I really don’t see who can take them down,” he says.

What has hurt the company’s share price, at least, are attacks launched by short-seller Citron Research and its spokesperson Andrew Left. Over the past six months, Left has twice has taken to criticizing Shopify, with his invectives producing noticeable drops in the company’s share price.

The latest salvo involved the claim that Shopify’s business model is overly reliant on its merchants’ access to Facebook as a selling platform and, with the social media giant potentially facing regulation measures as a result of privacy concerns, the claim goes, Shopify’s product is bound to suffer.

On that point, Papageorgiou disagrees.

“I think that’s very far-fetched,” he says. “I don’t think Facebook is by any means [Shopify’s] biggest channel. I think the biggest channels are these merchants’ websites and that’s why they’re opening them, to attract customers to their own sites.”

“I think it’s still very early [in Shopify’s growth cycle],” he says. “Keep in mind that most of Shopify’s customers are in the US, Canada, the UK and Australia. The international expansion has never been a priority because the company was busy establishing a broader platform. They’re starting to go after international markets now, with Germany, France, Singapore and Japan being targets this year. I think Western Europe is ripe for this company so we have about 600,000 Shopify merchants and they’re suggesting that the total addressable market is about ten million in their immediate market and about 45 million globally — I think that’s probably roughly right, so we’re still early.”

“If you believe the 10-million number, we’re six per cent penetrated, so there’s lots of room to go,” he says.