Internet-based software to design, set up and manage stores across multiple sales channels is a boon to the new and growing legalized cannabis industry. This software firm continues to attract and retain key marijuana merchants as clients, including the B.C. and Ontario government.
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SHOPIFY INC., $226.66, symbol SHOP on Toronto (Shares outstanding: 110.6 million; Market cap: $25.1 billion; www.shopify.ca), offers merchants of all sizes Internet-based software to design, set up and manage stores across multiple sales channels. They include both permanent and temporary retail stores, but also web, mobile and social-media platforms.
The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.
The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.
In the three months ended December 31, 2018, and excluding one-time items, the company made $27.9 million, or $0.26 a share. (All figures except share price and market cap in U.S. dollars.) That’s up 89.8% from $14.7 million, or $0.15 a share, a year earlier.
Shopify continues to attract more merchants to its platform. As a result, its revenue in the latest quarter jumped 54.3%, to $343.9 million from $222.8 million a year earlier.
The company’s balance sheet is strong: it holds cash of $2.0 billion and has no debt.
In the latest quarter, Shopify’s Gross Merchandise Volume (GMV) rose 53.8%, to $14.0 billion from $9.1 billion a year earlier. GMV is the total value of merchandise sold through merchant-to-customer exchanges.
The company also continues to expand its services to attract and retain merchants. These include Shopify Shipping and Shopify Capital.
Shopify Capital advanced $71.8 million in cash to merchants in the latest quarter. That’s 80.9% higher than the $39.7 million it lent in the year-earlier quarter. Since the launch of Shopify Capital, merchant cash advances have totalled $447 million, out of which $92 million was outstanding on December 31, 2018.
Shopify Shipping, which assists merchants with their order shipping, is now being used by about 40% of eligible merchants across the U.S. and Canada.
Meanwhile, cannabis growers and retailers continue to choose Shopify’s software and services to run their operations.
For example, the British Columbia government selected Shopify to provide an e-commerce platform for the online sale of non-medical cannabis. The B.C. Liquor Distribution Branch will be the sole wholesale distributor in the province, although its retail locations will compete with private sellers. Shopify will create two separate websites to fulfil online orders: one for consumers, where the age of the purchaser will be verified, and the second for public and private retail stores. Couriers will also verify the age of buyers at delivery. At-store pickup of online orders is still under consideration. The B.C. distribution centre for orders will be located in a 6,500-square-metre facility in Richmond.
The Ontario Cannabis Store (OCS), a subsidiary of the Ontario Liquor Control Board, also uses Shopify’s e-commerce platform to power its online cannabis website. The new government of Premier Doug Ford now plans to permit private retailers to sell cannabis, starting April 1, 2019. However, OCS will still be the only online seller of cannabis, at least for now.
Among licenced Canadian cannabis producers, Canopy Growth, Aurora Cannabis, Hydropothecary Corporation and, most recently, The Green Organic Dutchman, have signed e-commerce deals with Shopify.
The company’s contract wins with marijuana growers and retailers—including governments—represent only a small part of its current revenue. However, industry contributions to revenue and earnings should continue to rise after legalization given the company’s leading software and services. Shopify’s experience in Canada will also give it an edge as other countries begin to legalize cannabis.
We think Shopify shares have room to rise. Meanwhile, though, the stock trades at a very high 245 times the forecast 2019 earnings of $0.70 U.S. a share.
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