Q2 2020
A few events worth highlighting:
∙ The number of Covid-19 infections and related deaths across the country has climbed to more than 3 million and 136,000 respectively (and that’s official reports, the real estimates are significantly higher).
∙ Demonstrations across America are asking the country to come to terms (and fix) a history of glaring structural inequality and systemic racism.
∙ According to recently released statistics, the unemployment rate is 11.1%, meaning that millions of hard-working Americans remain dependent on government subsidy.
Despite these destabilizing national challenges, the S&P returned 20%1 for the second quarter of 2020, which is the largest quarterly gain seen since 1998. As I write this now, a week into the third quarter, the S&P 500 index year-to-date return is still in negative territory with a decline of 1.43%. The three bullet points I outlined above would seemingly indicate a more pessimistic outlook in the short term for stocks. But, as I will regularly remind anyone who will listen, trying to understand the market’s movements during a short period of time is nearly always a fool’s errand.
Instead, if you squint and focus on the long term, you might notice that there is slow and steady growth of positive changes happening all over the world. The incremental nature of the advances rarely is newsworthy. The past decade has seen remarkable scientific achievements, from health care to space exploration, and the ubiquity of internet access. On a global macro-level, these developments form the bedrock of my generally optimistic perspective on the future growth of companies with the specific characteristics that I seek out in my investment philosophy.
And so, while I work hard to keep abreast of “the news,” I concentrate my efforts on blocking it out. Ultimately, my investment philosophy revolves around determining narratives that will endure for the next 5-, 10-, 20- year periods and beyond. By investing in a handful of the right companies, and holding on to them, investors can achieve returns that build wealth in a meaningful way.
Company Spotlight: Shopify (Ticker: SHOP)
In this section, I will focus on a company I am personally invested in and explain my rationale for investment. Moving forward, each quarter I aim to “spotlight” one company that I believe is well suited to long term growth based on strong underlying fundamentals and secular tailwinds. Here we go…
For many years there has been a relentless focus on the growth of “E-commerce.” What you may not realize is that offline spending still accounts for 88% of retail dollars spent in the US this year. Despite the massive growth opportunity that online commerce has been for the last 20 years, there will always be a place for brick and mortar retail. In fact, some of the most successful new retailers (think Warby Parker or Casper) born as “internet-only” have built a physical footprint to complement their digital offerings. My belief is that the majority of retailers need to embrace an omnichannel approach that bridges the offline and online experiences. Additionally, these companies want (and need) to own the customer relationship without being subject to the rules and conditions of Amazon’s marketplace, and suffer from its dominance. So how can a company exist online, without selling on Amazon or investing the capital to offer a similar online experience? Enter Shopify.
Shopify is a Canadian-based company that is likely the largest and fastest growing company you have never heard of. Shopify's mission is to help small businesses and entrepreneurs start selling online. It provides a plethora of tools, ranging from the basics of website creation payment processing, to more complex needs such as inventory management. In fact, the company has invested significant resources to build out a logical infrastructure network enabling any sized company to offer 2-day shipping by storing their goods in Shopify warehouses. The company offers plans to merchants (its customer) that cost less than $50 per month, allowing any small business owner to affordably create an online presence. Large venerable companies find benefits as well; just take a look here to read about how 151-year-old Heinz found a new use to sell condiments directly to consumers in the pandemic.
At an analyst presentation last year, Shopify shared the slide below describing its “flywheel.” Essentially, as the number of merchants using its platform increases, Shopify’s revenue grows it gains new insights on customer needs. This then gives Shopify resources to build more capabilities and offerings to all of its customer base, and thereby improving the merchant experience. The improved operations for the merchants spurs increased sales on the Shopify platform, which benefits the customer and Shopify (which takes a small slice). Merchants see the growth opportunity and want to join the Shopify platform, and the cycle continues.
In fact, Shopify has demonstrated explosive revenue growth over the last few years. It rose 73% in 2017, 59% in 2018, and 47% in 2019 respectively. More than sales growth, I believe in the founder Tobi Lutke who is also the largest individual shareholder and owns 7% of the shares outstanding. This ties his wealth to the success of the company and aligns his incentives with mine. The company recently hit a milestone of working with its one millionth merchant, and that’s only a fraction of the 28.8 million small businesses that are in the U.S., according to the Small Business Administration. Not content to work with all U.S. based retailers, the true focus includes the other 85-100 million merchants estimated by the International Finance Corporation to exist worldwide.
I purchased shares of Shopify in 2018, and am currently sitting on a return of nearly 900%. This level of performance is not something I expect from every investment. Many market commentators blanch at its eye-popping $120 billion dollar market capitalization. There is plenty of likelihood that the optimism baked into its current share price, and if deflated the company may drop by more than half in the next year. But as I’ve said, I invest for the long term and am prepared to own a stock whose share price can travel to many different places. If I exercise patience, and continue holding through 2030, perhaps I’ll be writing about how Shopify is worth 25 times what I paid for it. With time, patience, and a willingness to weather the storm with a company you believe in can result in massive gains and market beating returns.
Final Thoughts
I don’t pretend to have a crystal ball showing what will happen in the next few months before writing again, but will be sure to pay close attention. I will continue preparing for my licensing exam, and working to build a business that grows the wealth of my clients. Be well and stay safe out there!
Important Notice: The above commentary is provided for informational purposes only, and should not be considered investment advice. Please do your own research before completing any financial transaction.
1 - https://www.wsj.com/articles/global-stock-markets-dow-update-6-30-2020-11593508397
2 - https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
