This writeup is going to read differently to most on VIC given that Shopify trades at ~30x 2022e sales and ~60x 2022e gross profit but I'm going to try and argue the case that despite looking expensive for what it is today, Shopify is actually inexpensive for what it can and likely will become in the future. I figure some readers might give up around here given the multiples I just cited. I hope you have some fun tags for this writeup. 

I think you'd need to have spent the last two years in a cave not to have at least heard of Shopify and have a passing understanding of what the company does so I'll keep this part brief. In short, Shopify is the world's leading cloud-based commerce engine that enables SMBs and increasingly enterprises to conduct commerce, traditionally online but increasingly via brick-and-mortar channels too. What's actually covered by this buzzword-y term "commerce engine". Good question. In a nutshell, the Shopify platform enables merchants to (a) design, set up and manage their online store, (b) obtain a single view of their business and customers across all of their sales channels, (c) manage products and inventory, (d) process orders and payments, (e) build and enhance customer relationships and (f) perform analytics and financial reporting. They can do all of that in one place either via a desktop browser or iOS/Android apps. 

What do I think the market is still missing or at least not fully grasping about Shopify today? 

It might not be obvious to a casual observer given a lack of reliable or widely disseminated data on the industry but I believe that Shopify has essentially won the market for SMB commerce engines today. I have often found that competitor abandonment of a marketplace is one of the strongest possible indicators of forward looking stock market returns and so when the BigCommerce CEO said that they abandoned the SMB market a few years ago after concluding that Shopify would be impossible to catch or beat, my ears pricked up. I think it's also instructive to note that Squarespace listed after almost 20 years of existing as a very profitable private company. Why? I'd guess they see the writing on the wall. The revenue pools within this space will shift more slowly than in other industries given the subscription nature of the product but all the data I see and anecdotes I hear suggest that the vast majority of net new SMB merchants are signing up to do business via Shopify today. 

Shopify is in the process of executing a textbook innovator's dilemma-style disruption of the enterprise market. They started with a cheap and easy-to-use offering for SMBs and then made it better and better and better until it started to become competitive on an increasing number of vectors with the traditional enterprise-focused alternatives, many of which were increasingly starved of attention and focus as small parts within larger organisations (Magento within Adobe and Demandware within Salesforce) while remaining far cheaper. 

Shopify is systematically solving every pain point and friction a merchant faces. That means that every expense line item within a merchant's P&L is a source of opportunity for Shopify to both help their merchants become more efficient and to capture some of that value creation for themselves. This strategic direction is clear from their product launches over the last decade. Shopify added Shopify Payments in 2013 (merchants can tick a box and you're up and running accepting payments). Shopify added Shopify Shipping in 2015 (merchants can access negotiated wholesale rates if you buy shipping services via Shopify). Shopify added Shopify Capital in 2016 (merchants can, if eligible, borrow money to fund working capital needs without having to provide any additional information). Shopify launched a beta of fulfilment in 2019 (merchants get access to intelligent demand forecasting, inventory allocation and order routing). Shopify added Shopify Email in 2020 (merchants can create, send, and track email marketing campaigns). Shopify just launched Shopify Markets (merchants can, by ticking a box, sell in and export to 100+ countries with website translation, currency conversion, local payment methods and local duties all taken care of via automation). There are still ample future opportunities for further broadening and deepening the merchant relationship. Shopify Balance will be powered by Stripe Treasury and is still in beta today but will be an easy to set-up business bank account for Shopify merchants with none of the hassle or fees that come with a traditional banking relationship. Shopify has a huge white space in marketing that they started to penetrate with Shopify Email but clearly has other untapped vectors. Shopify acquired two small businesses (Handshake and Eporta) to kickstart and then accelerate their foray into creating a B2B marketplace via which merchants could more easily and transparently buy wholesale. 

Shopify's scale and vertical integration has the potential to create a mesh of intertwined competitive advantages. Why do I say that? Shopify will not only benefit from the traditional competitive advantages that leading software businesses enjoy – R&D economies of scale, customer switching costs, deep partner ecosystems, developer familiarity, to name a few. Shopify also has visibility into how its merchants spend their marketing dollars and the behaviour of consumers that land on its merchants pages - what they put in the cart, what they buy and how they pay. Shopify has a unique ability to leverage the data that comes with $200b of GMV and more than a billion monthly unique consumers across its ecosystem to drive better outcomes for merchants. Amazon has turned a similar stream of data into a $30b per year high margin advertising business. I don't know exactly what Shopify will do with it but whatever they do, I'm confident (a) they will make sure it creates value for merchants and (b) it will be impossible for the competition to replicate it. 

Shopify's management team is exceptional. There's no other way to put it. I encourage anyone interested in the business and the thesis to listen to one or more of the many podcasts that Tobi has done. I am confident you will not be disappointed by the passion he has for the business, the product and the customers nor the quality of his strategic thinking. 

I've tried to lay out why I think this is such a remarkable company but to give me a better chance of getting you to buy into the projections you'll get to later I want to give a few more tangible anecdotes that drive home just how remarkable what Tobi and team have created here is. 

#1 by the time the year is done, Shopify will have almost 200xed revenues from 2012 to 2021 ($24m to $4.6b) and 130xed gross profit ($19m to $2.5b). 

#2 Shopify did that while burning cumulatively just shy of $50m of EBIT – that's based on GAAP EBIT, not some 20% EBIT margin fantasy where the company is issuing 25% of revenue every year to employees as grants. 

#3 in 2021, merchants powered by Shopify saw aggregate unique traffic exceed Amazon's for the first time. 

#4 Shopify has cemented its position as a platform that can work for even the largest retailers as we just saw Shopify customers Figs and Allbirds successfully list and Shopify Plus ARR reached ~$325m at the end of Q3. 

#5 Shopify guided earlier this year that they'd be breakeven in 2021 at the EBIT level but had to raise that guidance later on during the year as they admitted they couldn't hire people fast enough to stop the company from printing money and the street now thinks they're going to make ~$300m of EBIT this year 

#6 Shopify management have proven to be smart value creators as they've sought to leverage partnerships into value creating events for the company - witness their preferred partnership deals with Affirm and GlobalE that have netted them stakes worth ~$4b between the two and their participation in Stripe's funding rounds which I think I can go out on a limb and safely say is an IPO that will pop with a capital P. 

#7 This is a direct quote from a large customer - "for $12,000 a year you're getting a better product with better service than I was getting spending $500,000 a year managing three separate platforms". 

If I've not lost you yet, the question then becomes what mental contortions can we possibly perform to back into a scenario where Shopify's ~$200b market cap meaningfully undervalues the future prospects of this company. This section will take a bit more imagination and optimism but I'd encourage you to read this excellent piece by James Anderson of Baillie Gifford in which he encourages investors to "focus on finding investments that could go spectacularly right". 

#1 The market itself. There aren't great statistics on the size of the global or developed world commerce market so we have to back into it. If we look at the US where the data is more reliable and accessible, total retail sales in 2019 ex autos/building materials/gas were ~$3.4t and ~22.5% of those were online. The total retail sales pie has historically grown at a ~4% CAGR while online penetration had been increasing at ~150 bps per annum in recent years (before COVID). If we lazily extrapolate both of those trends, we end up with US retail sales ex autos/building materials/gas in 2030 of ~$5.3t and ~39% online or ~$2.1t of online commerce. The US share of global GDP ex China (let's just assume China is impenetrable for convenience) is ~30%. The US spends ~20% more on retail sales (as a % of GDP) than most countries. If we use these two rough datapoints, they suggests that in 2030 ex US online commerce will total ~$4.2t or Shopify's TAM will be ~$6.25t. 

#2 The portion of ecommerce spending that is actually addressable by Shopify. I simplistically frame ecommerce merchants as one of three buckets - (1) platforms like Amazon, eBay or Etsy, (2) the top 20 or so retailers who can legitimately build their own solutions and (3) everyone else. The addressable market for Shopify is the entirety of (3). In the US Amazon + eBay + Etsy are almost 50% of the retail ecommerce market today so let's call it 50% for (1), the top 50 retailers are another ~25% of the market leaving ~25% in need of a Shopify-like solution. That's the US where you have some uniquely large and dominant platforms and retailers. I "round up" the 25% to 30% as we move to the global opportunity where retail market structures tend to be more fragmented which would imply a SAM of ~$1.9t. 

#3 The ultimate market share that Shopify reaches. If you read BigCommerce's slides they suggest that the total market for "commerce engines" was $5.2b in 2020, split ~65% cloud / ~35% on-premise and split ~70% B2C / ~30% B2B. If we take Shopify's pure subscription revenues of ~$900m in 2020, they currently hold ~17% of the market but ~27% of the cloud-based market and ~38% of the cloud-based B2C market (assuming similar cloud/on-premise splits between B2C and B2B). That's pretty impressive given Shopify's subscription revenues in 2012 were less than $20m and their market share was a rounding error away from zero. I think a reasonable assumption of Shopify's market share in 2030 is 70%. Why? Three reasons. #1 It seems from casual observation that software markets have winner-takes-most tendencies thanks to economies of scale, customer familiarity, integrator/developer ecosystems. This appears true in CRM (Salesforce), content creation (Adobe), ITOM (ServiceNow) to name just a few of the more obvious instances. #2 Shopify has gone from effectively zero to 35-40% of the cloud-based B2C market in 8 years. The entire market is likely cloud-based by 2030 and the Shopify flywheel is really spinning now (they're moving increasingly upmarket, they're adding SI partnerships, they're hiring aggressively – the list goes on) so I don't see why that pace of share gain can't continue. #3 If you scrape the web to count the number of sites using different commerce engines, you can see that of the net new sites in the last three years between the major vendors, Shopify has captured ~70% of the URLs. #4 There's a DTC data service that shows Shopify already powers ~60% of DTC retailer website. If we put that all together, I don't think 70% is at all unreasonable. That implies a Shopify captures merchants delivering ~$1.3t of GMV in 2030. 

#4 The cost of a Shopify subscription. Today Shopify's subscription take rate as a % of GMV is ~80 bps. I assume that holds flat over time as a function of two factors pulling in opposite directions. The tailwind is the undeniable latent pricing power that Shopify sits on today. Shopify customers frequently cite the fact that what they are getting is both better and in many cases literally multiples cheaper than alternatives, clearly indicating latent price inelasticity should management ever choose to flex pricing higher. The headwind is the mix-shift towards enterprise merchants who naturally come on at a lower take rate. That said, the SMB side of the business has been so healthy in recent quarters despite the push upmarket that this take rate metric has been extremely stable around 80 bps for the last year or so. That implies that by 2030 Shopify's B2C subscription revenue will be ~$10.5b 

#5 The B2B opportunity. The BigCommerce data suggests that the B2B market is a little less than half the size of the B2C market. If we take that datapoint and assume it is still true in 2030 and that Shopify captures ~1/3 of the market (justifiably less than B2C given they are relatively late movers here and this is always going to be less of a focus for the company than their core B2C merchant base), that's another ~$2b of subscription revenue. 

#6 The merchant solutions opportunity. This part could get really long and really hypothetical given that, as I said earlier, Shopify is systematically solving every pain point and friction a merchant faces so I'll try to keep it as concise as possible and tackle any follow-ups should they arise in Q&A. If we assume Shopify Payments penetrates 80% of GMV by 2030 (up from ~50% today) at a 2.6% take rate (roughly the current take rate), that's ~$27b of revenue. If we assume BNPL penetration reaches 20% (it's already well above that in Australia) and Shopify keeps half of a 4.1% MDR (Affirm network revenue as a % of GMV last quarter) as a "distribution fee", that's ~$5b of revenue. If we assume that Shopify Fulfilment Networks is ultimately used by 2/3 of merchants (by GMV) and that it charges a 10% fee (what GlobalE charges on fulfilment handling) on 18% of merchant revenue (the average of what several listed online retailers spend on fulfilment), that's ~$16b of revenue. If we assume 50% of merchants (by GMV) use Balance, that their loans / revenue ratio is 10%, that lending partners make a 4% RoA (before tax) and that Shopify retains half of those economics, that's ~$1b of revenue. If we assume that the average merchandise margin of a Shopify merchant is 60%, that 10% of wholesale costs are digital marketplace-addressable and that Shopify takes a 5% fee (well below traditional marketplace take rates), that's ~$3b of revenue. If we assume that the current 6 third party applications from the Shopify AppStore per merchant metric holds over time, an average third party app cost of ~$15 per month and a 15% take rate for Shopify (where it is today), that's ~$3b of revenue. If we add that all up, that's ~$56b of revenue. 

#7 The terminal margin. This is going to be a software company generating almost $70b of revenue. If we make an adjustment for the pass-through costs embedded in the 2.6% take rate in payments to get to a truer "net revenue" number, that comes down to ~$55b. I think the company is easily capable of 50% margins at that point in time. There are plenty of dominant software (for example, Adobe) and payments (for example, Worldpay or Adyen) businesses operating at that level of margin (if not higher) though few if any of them are operating at the scale that Shopify might be by 2030. It's worth explaining why Shopify's expansive suite of solutions is an important lever to sustainably high margins in a competitive industry. To acquire a new customer today, Shopify is, on the margin, competing with Wix or Squarespace or GoDaddy to spend performance marketing dollars effectively. That competitive dynamic largely dictates Shopify's CAC. The difference is that these are narrower businesses where the breadth and depth of monetization opportunities is far less than it is at Shopify. That means Shopify gets to acquire customers at prices that reflect models built on competitors' merchant LTVs but actually then gets to benefit from its own far higher LTVs given all the services and solutions that it can cross and upsell once a merchant is onboard. In 2020 Shopify spent ~40% of GP on S&M and grew GP ~80% Y/Y while Wix spent ~65% of GP on S&M and grew GP ~20% Y/Y. This dynamic will only compound and Shopify's structural advantage will only widen over time as the suite of merchant solutions continues to grow and should serve to help keep Shopify's customer acquisition costs reasonable despite operating in a fairly churn-y space. 

If we put the above assumptions together you'd be looking at a company generating ~$27.5b of EBIT in 2030. If we value that on 30x NOPAT that's a ~$700b EV. If we credit them for net cash today (~$7b), stakes in a few large businesses (namely Affirm, Global-E and Stripe) worth ~$4.5b and ~$120b of cumulative NOPAT between now and then, that's a ~$830b market cap. That's just shy of a 4x from here or an 18% IRR over the next decade. If you assume a fair cost of equity of 8%, that implies FV for the stock today is ~$3,500 or a little over a double. 

It's worth flagging that in trying to frame some very hypothetical outcomes for this business I've really only covered the big stuff within what we know is coming. I've not included Shopify Capital given it's very small. I've not included Shopify Markets given it just launched and we don't know that much about it. I've not included any revenue for Shopify from providing marketing tools and services to merchants or Shopify Audiences. I've not included any revenue directly accruing from what Shopify ultimately chooses to do with the Shop App. I've not factored in any upside from the potential success of their PoS software solution. The point I'm trying to make here is that there's a lot of optionality in the business for an outcome that is even better than the already-impressive one I pencilled out.